While the mortgage crisis undermines the entire economy, nobody is taking responsibility or accepting accountability. But plenty of people are playing the mortgage meltdown blame game. Lots of fingers point to rating agencies that gave high marks to grossly underperforming assets.

In the run-up to the mortgage crisis, companies in the business of buying securitized mortgage products leveraged themselves to the hilt, routinely buying as much as 30 times the value of their pledged collateral. Is it any wonder that we're in the mess we're in? By itself, that practice is a recipe for a credit catastrophe. But now we know that the so-called collateral was also hyped, leveraged, and not worth nearly as much as its stated value. Trusted credit rating agencies may be to blame.

Mortgage meltdown

In the absence of official government regulation, and the transparency of bookkeeping that goes hand in hand with prudent oversight, investors rely on private rating agencies to appraise assets. Had the agencies been vigilant, they would have noticed that the assets based on mortgages were losing value in a dangerously precipitous fashion. They might have surmised that housing prices don't continue to rise forever, and that, as the real estate bubble expanded, the underlying potential for further asset appreciation shrank. The catastrophic impact of the mortgage crisis could have been drastically lessened if the credit of many ailing financial institutions had been appropriately lowered by credit rating agencies.

But there's an apparent conflict of interest for the rating agencies, because the companies getting rated are the same ones that pay the rating agencies in the first place. It's like paying an appraiser to tell you how much your home is worth-which is why mortgage companies don't accept appraisals ordered by homeowners, but insist upon hiring their own appraisers. Government officials started cracking down on rating agencies this year, but it was too late to avert the mortgage crisis.

Conflicts of interest

A few months ago, three of the most influential agencies-Standard & Poor's, Moody's, and Fitch-reached a deal with the New York state attorney general's office to change how they do business. The agreement seeks to end the practice by having the issuers pay the credit-rating agencies in four installments during the rating process, not just at the end when the rating is awarded. Agencies also agreed to change how they rate mortgage lenders and their mortgage-underwriting processes, and to post ratings online for consumers to view before taking out a mortgage.

"The mortgage crisis currently facing this nation was caused, in part, by misrepresentations and misunderstanding of the true value of mortgage securities," New York Attorney General Andrew Cuomo said in an article in the Washington Post. But critics argue that changing the pay structure doesn't address the more fundamental problem of a conflict of interest between agencies and the companies they rate. They also complain that, even when agencies downgrade companies, they do it too late-by then, the problem has already exacerbated the mortgage crisis.

    Published on October 20, 2008