Collapsing Mortgage Securities. Broken Processes. No Accountability. Sound Familiar?

[Passages]

Faulty credit ratings were a cause of the 2008 crisis. One whistleblower complaint argues that the same dynamic is happening again.

BY DAVID DAYEN AUGUST 14, 2024

Troubles in the commercial real estate (CRE) markets, which have been predicted for years, appear to be growing. Delinquency rates above 30 days on office building loans ticked up in June, representing close to $2 billion in losses, according to a report from Moody’s. Office vacancies are at a record high of slightly over 20 percent, and this has translated into loan defaults, stretching from the Illinois Center tower in Chicago to a suite of office buildings in Mountain View, California, in the heart of Silicon Valley.

A couple billion in defaults in a market valued around $20 trillion isn’t worth worrying about. But a significant chunk of CRE loans are starting to come due for the first time since the pandemic greatly increased working from home. Prices on commercial properties began dropping last spring for the first time since 2011, and regional and local banks, which are more exposed to these loans, are in a particularly precarious position. Regulators are even starting to talk about fraud and questionable valuations in these markets.

Experts have described CRE as “a train wreck waiting to happen.” But Moody’s is a company that’s supposed to have seen the train wreck coming. It is a credit rating agency, which assesses risks in bonds and securities and assigns a rating that reflects those risks. If losses in bonds backed by CRE were inevitable, the credit rating agencies should have built that into their models rather than assigning them super-safe ratings.

Now, however, we’re seeing large downgrades in commercial mortgage-backed securities (CMBS), the debt instruments that are tied to CRE loans. Those downgrades are at the highest in “recent memory,” analysts at Bank of America said last year, with 40 deals affected.
https://prospect.org/economy/2024-08-14-collapsing-mortgage-securities-broken-processes/

[Lochloosa]

1. Credit rating agencies caused the housing crisis.

Watch The Big Short to get an idea of what happened. And still no accountability.

[jimfields33]

2. This happened in 2008 at this very timeframe.

Hopefully it gets fixed ASAP.

[progree]

3. Credit rating agencies are still paid for ratings by the issuer of the securities, OMG!

I've read at least 2 books about the 2007ff housing bubble collapse, and I've always thought that the very worst thing I read about all that was that securities issuers paid the credit rating agencies for ratings. So I've long been wondering if that's still a problem. Yup. The article goes through a lot of examples of strangely high ratings given to dubious projects.... finally we get to the part about what Dodd-Frank didn't change:

. . . The Big Three rating agencies—S&P, Moody’s, and Fitch Ratings—control approximately 95 percent of the industry, although there are small rating agencies like Kroll and Morningstar. They are typically paid by the issuers of the securities, a major conflict of interest that was identified during the financial crisis. Rating agencies may be inclined to give good ratings to the issuer that pays them, in the hopes of getting more business. An attempt to change the issuer-pays model during Congress’s crafting of Dodd-Frank failed miserably (link).

. . . One problem with getting accountability for rating agencies is an obscure decision made by the SEC in 2010. Ford Motor Credit (FMC) wanted to promote an asset-backed security without putting its credit ratings in their registration statement. This would have violated Section 939G of Dodd-Frank, but the SEC went along with it by issuing a “no-action” letter, essentially giving FMC and anyone else the ability to do this. By eliminating rating agencies from the registration statement, it removes their Section 11 liability, which allows investors to sue over misrepresentations or omissions in a registration statement.

Current SEC Chair Gary Gensler and the Division of Corporation Finance could withdraw that no-action letter unilaterally, without new rules. A bipartisan group of issue-based groups and analysts asked the SEC’s Division of Corporation Finance to withdraw the FMC no-action letter in 2022. A separate letter from experts was sent in 2023 urging the SEC to subject rating agencies to Section 11 liability. But the letter’s policy remains in effect.

This is why rating agencies largely escaped liability for the financial crisis, and why lawyers for investors see little way to hold rating agencies accountable for failures today.
. . .

emphasis added

[Mopar151]

4. Why do skeezballs gravitate to low end real estate?

The lack of accountability may be a part of it, but the camaraderie is a bonus! Tell you how honest they is, on every piece of paper they hand you.

[Celerity]

5. K & R