Posted by Matt Purdue
Not that I ever like to see anyone lose a job (schadenfreude is just not my bag), but the resignation of Moody’s president and COO Brian Clarkson last week may sound a tiny ring of truth amid all the clamor over the U.S. mortgage investment collapse.
Clarkson, 52, led Moody’s aggressive move into the business of analyzing and rating the creditworthiness of mortgage-backed securities. Based in large part on the ratings Moody’s and the two other major agencies gave to these complex vehicles, investors and banks around the world poured money into them in recent years. Today, as we all know, many of those investments are near worthless.
To its credit, at least Moody’s was somewhat straightforward about Clarkson’s departure. CEO Ramond McDaniel wrote to employees that the credit-market implosion “created scrutiny and criticism from numerous external sources about various aspects of our business. While much of the criticism…is unfounded, Brian believes that the time is right for new leadership….”
The time is right for new leadership, indeed. We need leaders who will explain to us how the ratings agencies missed the mark on complicated securities, particularly as the other shoe is about the drop in the mortgage mess. Last week, leading mortgage bankers and the Treasury Department met to discuss how to handle the problem of second-lien housing defaults.
Second-lien loans are more commonly known as second mortgages. Homeowners across America borrowed billions of dollars against their (real or imagined) home equity over the past few years. Some paid off high-interest credit cards; others started home improvement projects. Speculators took out second mortgages on their primary homes to buy second and third “investment properties.” Of course, the mortgage lenders and investment banks bundled these second mortgages and sold them as securities, just as they did with home loans.
Now, the powers-that-be realize that borrowers are not only walking away from their home loans, but also from their second mortgages. This shouldn’t surprise anyone, but apparently the feds and the banks now need to figure out how to get everyone out of this mess. Standard & Poor’s recently stopped rating mortgage-backed securities (MBS) propped up by second mortgages, citing “anomalous and unprecedented” behavior by borrowers. Yep, walking away from a home with not one but two unpaid mortgages would seem fairly anomalous, but that doesn’t fix the fact that the horse is already out of the barn. In 2007, as the housing crisis peaked, S&P rated $18 billion worth of these MBSs.
These investments were always a little shaky; many of them were rated Alt-A to begin with, a step above subprime. But get this: Half of the subprime home loans made in 2006 also had a second-lien loan attached to them. Yes, lenders were not only making home loans to millions of Americans with poor credit, but they also were making simultaneous second-mortgage loans to them. And then these loans were being bundled, rated by folks like Moody’s and sold to investors as securities. The ratings agencies have recently been busy downgrading tens of billions of dollars worth of these investments. Now they tell us.
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