Credit rating agency reform / John De Luca and Paul Russo, editors.

Format:

Book

Contributor:

De Luca, John.

Russo, Paul.

Language:

English

Subjects (All):

Credit bureaus.

Credit ratings.

Physical Description:

1 online resource (227 p.)

Edition:

1st ed.

Place of Publication:

New York : Nova Science Publishers, c2009.

Language Note:

English

Summary:

Presents an overview of subprime mortgage securitisation process as well as the seven key informational frictions that arise. This book discusses the rule amendments that the Commission intends to propose which would reduce undue reliance in the Commission's rules on nationally recognized statistical rating organizations (NRSRO) ratings.

Contents:

Intro

CREDIT RATING AGENCY REFORM

CONTENTS

PREFACE

Chapter 1 CREDIT RATING AGENCY BACKGROUND

I. BACKGROUND

A. Introduction

B. The Credit Rating Agency Reform Act of 2006

C. The Role of Credit Ratings in the Credit Market Turmoil

1. THE CREATION OF SUBPRIME RMBS AND CDOS

2. DETERMINING CREDIT RATINGS FOR SUBPRIME RMBS AND CDOS

3. THE DOWNGRADES IN CREDIT RATINGS OF SUBPRIME RMBS AND CDOS

II. PROPOSED AMENDMENTS

A. Amendments to Rule 17g-5

1. ADDRESSING THE PARTICULAR CONFLICT ARISING FROM RATING STRUCTURED FINANCE PRODUCTS BY ENHANCING THE DISCLOSURE OF INFORMATION USED IN THE RATING PROCESS

a. The Proposed Amendment

b. Proposed Guidance for Compliance with Provisions of the Securities Act of 1933

I. Public Offerings

II. Private Offerings

III. Offshore Offerings

2. RULE 17G-5 PROHIBITION ON CONFLICT OF INTEREST RELATED TO RATING AN OBLIGOR OR DEBT SECURITY WHERE OBLIGOR OR ISSUER RECEIVED RATINGS RECOMMENDATIONS FROM THE NRSRO OR PERSON ASSOCIATED WITH THE NRSRO

3.RULE 17G-5 PROHIBITION ON CONFLICT OF INTEREST RELATED TO THE PARTICIPATION OF CERTAIN PERSONNEL IN FEE DISCUSSIONS

4. RULE 17G-5 PROHIBITION OF CONFLICT OF INTEREST RELATED TO RECEIPT OF GIFTS

B. Amendments to Rule 17g-2

1. A Record of Rating Actions and the Requirement that they be made Publicly Available

2. A Record of Material Deviation from Model Output

3. Records Concerning Third-Party Analyst Complaints

Clarifying Amendment to Rule 17g-2(b)(7)

C. Amendments to the Instructions for Form NRSRO

1. Enhanced Ratings Performance Measurement Statistics on Form NRSRO

2. Enhanced Disclosure of Ratings Methodologies

D. Amendment to Rule 17g-3 (Report of Credit Rating Actions).

III. PROPOSED NEW RULE 17G-7 (SPECIAL REPORTING OR USE OF SYMBOLS TO DIFFERENTIATE CREDIT RATINGS FOR STRUCTURED FINANCE PRODUCTS)

IV. PAPERWORK REDUCTION ACT

A. Collections of Information under the Proposed Amendments

B. Proposed Use of Information

C. Respondents

D. Total Annual Recordkeeping and Reporting Burden

1. Amendments to Form NRSRO

2. Amendments to Rule 17g-2

3. Proposed Amendment to Rule 17g-3

4. Amendments to Rule 17g-5

5. Proposed Rule 17g-7

E. Collection of Information Is Mandatory

F. Confidentiality

G. Record Retention Period

H. Request for Comment

V. COSTS AND BENEFITS OF THE PROPOSED RULES

A. Benefits

B. Costs

1. Proposed Amendments to Form NRSRO

2. Proposed Amendments to Rule 17g-2

4. Proposed Amendments to Rule 17g-5

C. Total Estimated Costs and Benefits of this Rulemaking

VI. CONSIDERATION OF BURDEN ON COMPETITION AND PROMOTION OF EFFICIENCY, COMPETITION, AND CAPITAL FORMATION

VII. CONSIDERATION OF IMPACT ON THE ECONOMY

VIII. INITIAL REGULATORY FLEXIBILITY ANALYSIS

A. Reasons for the Proposed Action

B. Objectives

C. Legal Basis

D. Small Entities Subject to the Rule

E. Reporting, Recordkeeping, and Other Compliance Requirements

F. Duplicative, Overlapping, or Conflicting Federal Rules

G. Significant Alternatives

H. Request for Comments

IX. STATUTORY AUTHORITY

Text of Proposed Rules

List of Subjects in 17 CFR Parts 240 and 249b

Part 240-General Rules and Regulations, Securities Exchange Act of 1934

Exhibit 1

Exhibit 2

REFERENCES

Chapter 2 SUMMARY REPORT OF ISSUES IDENTIFIED IN THE COMMISSION STAFF'S EXAMINATIONS OF SELECT CREDIT RATING AGENCIES

I. SUMMARY

II. BACKGROUND

A. The Examinations.

B. Current Regulatory Requirements and Proposed New Rules and Rule Amendments with Respect to Credit Rating Agencies

III. THE RATINGS PROCESS

A. The Creation of RMBS and CDOs

B. Determining Credit Ratings for RMBS and CDOs

IV. THE STAFF'S EXAMINATIONS: SUMMARY OF FACTUAL FINDINGS, OBSERVATIONS AND RECOMMENDATIONS

A. There was a Substantial Increase in the Number and in the Complexity of RMBS and CDO Deals Since 2002, and Some Rating Agencies Appeared to Struggle with the Growth

Remedial Action

B. Significant Aspects of the Ratings Process Were Not Always Disclosed

Current Regulatory Requirements

Proposed Rules and Rule Amendments that Would Address These Issues

C. Policies and Procedures for Rating RMBS and CDOs Can be Better Documented

D. Rating Agencies are Implementing New Practices with Respect to the Information Provided to Them

Proposed Rules and Rule Amendments that Would Address Verification

E. Rating Agencies Did Not Always Document Significant Steps in the Ratings Process

Including the Rationale for Deviations from Their Models and for Rating Committee Actions and Decisions

and They Did Not Always Document Significant Participants in the Ratings Process

F. The Surveillance Processes Used by the Rating Agencies Appear to Have Been Less Robust than Their Initial Ratings Processes

G. Issues Were Identified in the Management of Conflicts of Interest and Improvements Can be Made

1. The "Issuer Pays" Conflict.

Proposed Rules and Rule Amendments that Would Address These Issues

2. Analysts' Compensation

3. Securities Transactions by Employees of Credit Rating Agencies

H. Internal Audit Processes

V. OBSERVATIONS BY THE OFFICE OF ECONOMIC ANALYSIS

A. Conflicts of Interest

B. Factual Summary of the Ratings Process for RMBS

Risk Variables

2. Use of Historical Data

3. Surveillance of Ratings

C. Factual Summary of the Ratings Process for CDOs

VI. CONCLUSION

Chapter 3 FEDERAL RESERVE BANK OF NEW YORK STAFF REPORTS: UNDERSTANDING THE SECURITIZATION OF SUBPRIME MORTGAGE CREDIT*

ABSTRACT

EXECUTIVE SUMMARY

1. INTRODUCTION

2. OVERVIEW OF SUBPRIME MORTGAGE CREDIT SECURITIZATION

2.1. The Seven Key Frictions

2.1.1. Frictions between the Mortgagor and Originator: Predatory Lending

2.1.2. Frictions between the Originator and the Arranger: Predatory Lending and Borrowing

2.1.3. Frictions between the Arranger and Third-Parties: Adverse Selection

Adverse Selection and the Warehouse Lender

Adverse Selection and the Asset Manager

Adverse Selection and Credit Rating Agencies

2.1.4. Frictions between the Servicer and the Mortgagor: Moral Hazard

2.1.5. Frictions between the Servicer and Third-Parties: Moral Hazard

Moral Hazard between the Servicer and the Asset Manager4

Moral Hazard between the Servicer and the Credit Rating Agency

2.1.6. Frictions between the Asset Manager and Investor: Principal-Agent

2.1.7. Frictions between the Investor and the Credit Rating Agencies: Model Error

2.2. Five Frictions that Caused the Subprime Crisis.

3. AN OVERVIEW OF SUBPRIME MORTGAGE CREDIT

The Motivating Example

3.1. Who Is the Subprime Mortgagor?

Industry Trends

3.2. What Is a Subprime Loan?

The Impact of Payment Reset on Foreclosure

3.3. How Have Subprime Loans Performed?

Motivating Example

Industry

3.4. How Are Subprime Loans Valued?

4. OVERVIEW OF SUBPRIME MBS

4.1. Subordination

4.2. Excess Spread

4.3. Shifting Interest

4.4. Performance Triggers

4.5. Interest Rate Swap

4.6. Remittance Reports

5. AN OVERVIEW OF SUBPRIME MBS RATINGS

5.1. What Is a Credit Rating?

5.2. How Does One Become a Rating Agency?17

5.3. When Is a Credit Rating Wrong? How Could We Tell?

5.4. The Subprime Credit Rating Process

5.4.1. Credit Enhancement

5.5. Conceptual Differences between Corporate and ABS Credit Ratings

5.6. How through-the-Cycle Rating Could Amplify the Housing Cycle

5.7. Cash Flow Analytics for Excess Spread

The Timing of Losses

Prepayment Risk

Interest Rate Risk

Other Details

5.8. Performance Monitoring

5.9. Home Equity ABS Rating Performance

6. THE RELIANCE OF INVESTORS ON CREDIT RATINGS: A CASE STUDY

6.1. Overview of the Fund

Fund Adequacy

Portfolio Composition

6.2. Fixed-Income Asset Management

Mandates (from ORC Sec 742.11)

Asset Management

7. CONCLUSIONS

APPENDIX 1: PREDATORY LENDING

The Role of the Rating Agencies

APPENDIX 2: PREDATORY BORROWING

Fraud for Housing

Fraud for Profit

APPENDIX 3: SOME ESTIMATES OF PD BY RATING

INDEX

Blank Page.

Notes:

Description based upon print version of record.

Includes bibliographical references and index.

Description based on print version record.

ISBN:

1-61728-212-X

OCLC:

923662376