Reinstating trust in the ratings process is key to growing investor interest, according to buyside participants in a panel at an asset-backed securities conference in Miami last week.
“Ratings won’t go away,” said John Kerschner, head of securitized products at Janus Capital. “We need ratings to help frame the calculus for a bond quickly. But does it mean you want to trade on the information? Not really.”
Kerschner added that nothing has really changed with ratings since the crisis. “It’s alarming because of the conflict of interest that continues to exists,” he said.
As an example he spoke on the problems created by Standard Poor’s withdrawal from the Goldman Sachs/Citigroup CMBS deal earlier this year.
This event, Kerschner said, was a big problem that lost some people money. “SP should have done more damage control,” he added. “You have this process that we trusted and it is broken.”
Another problem that must improve before investors can trust the deal rating process is that many new issues in the market continue to rely on a single rating agency. It is a big red flag that keeps investors away, he said.
“As an investor it’s helpful to have more than one rating agency on the deal especially when it comes to more esoteric asset classes,” Kerschner said.
Providing a defense of the rating position was panelist Ted Burbage, head of U.S. structured finance investor relations at SP. While its business model had not shifted, Burbage explained that SP has done a lot of work on improving the process by clarifying definitions and ratings criteria.
“The CMBS situation was very specific and we never provided a rating on that deal,” said Burbage in reference to the Goldman/Citi deal. “It is unfortunate and we don’t want that to happen again but the bottom line is that we don’t want to put a rating out that will have to be downgraded straight away.”
Fellow panelist Uri Ron, senior vice president at PIMCO, reiterated a much talked-about sentiment at this year’s conference: investors cannot over rely on ratings and should these as just another data point.
“It’s important to remember that securitized products are only a small part of the investment universe; there are people who could just ignore it completely,” Kerschner said. “The level of distrust in securitization products is very high and the burden is on us as an industry to get people outside this room comfortable with what we are doing.”
Daily Briefing | Thursday, October 27, 2011
FHFA Trims Estimate on the Ultimate Cost of the GSE Bailout
The Federal Housing Finance Agency Thursday morning released new estimates on the ultimate cost of bailing out Fannie Mae and Freddie Mac, cutting its worst case scenario projection to $311 billion from $363 billion.
Another Sign That Multifamily is Hot: Fannie MF Issuance is Rising
During the first nine months of the year Fannie Mae issued $16.7 billion of multifamily MBS, already surpassing its volume for all of last year.
ULI: Long, Slow ‘Grind’ For RE Recovery Except Apartments
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Top Title Insurers Earn Money And See Revenues Per Order Increase
The nation’s second largest title insurer, First American Financial Corp., earned $21 million in the third quarter, a 36% decline compared to the same period a year ago as revenues fell 3% due to a decline in title premiums.
Final FHA Figures for FY Show a Decline in Business
The Federal Housing Administration endorsed $217.8 billion of ‘forward’ single-family loans in fiscal year 2011, down 27% from the previous year, according to new figures released by HUD.
Trustmark Opens New Alabama Office to Support Growing Mortgage Business
Trustmark National Bank, Jackson, Miss., has set up a new mortgage lending shop in Birmingham, Ala., to serve its growing retail and wholesale customer base in the state.
Economist Sees a 3% Rise in Home Values — by 2013
After dropping 1.5% in 2011, home prices should be flat next year and finally gain traction in 2013, according to Macroeconomic Advisers chairman Joel Prakken.
Freddie Mac to Get New Chairman, CEO
Both the chief executive officer and the chairman of the board of Freddie Mac are stepping down within the next few months, the Federal Housing Finance Agency said late Wednesday.
Mortgage Rates Hover Near Record Lows
The average rate charged on most mortgage products remained relatively stable for the week ending October 27, hovering near their recent lows, according to figures compiled by Freddie Mac.
Pending Home Sales Dip Again
The number of consumers who signed contracts to buy homes fell for the third straight month in September after the traditional spring/summer buying season failed to entice many new buyers.