It’s different buying a bond rated AAA by one rating agency versus a bond rated AAA by one agency and AA by another. But what happens if the issuer chooses (conveniently) not to disclose the AA rating? Well, you might assume that one only rating was sought, and hence only one was provided.
At a time when disclosure and transparency are key directives of the new regulatory regime (under the Dodd-Frank Act), the American Banker has produced a timely article, critical of the state of affairs. With their permission, we’re providing for you certain key excerpts from their Feb. 28 article (click here for full article): (emphasis added)
Despite widespread allegations of botched loan administration and conflicts of interest, a review of the three main ratings agencies’ quality evaluations of servicers (including banks) show that virtually every servicer with a published rating is ranked as “proficient,” “average” or better.
Fitch, which rates servicers on a scale of 1-5, has no servicers rated below a 3 — a level it designates “proficient.”
Standard & Poor’s rates servicers according to how they stack up against “average” performance. Out of the more than 30 servicers on which it offers a public rating, all are average or better. Subpar scores exist under S&P’s system, a spokesman said, but are usually kept confidential by the servicer client paying for them until they can improve their performance.
Moody’s also rates servicer performance relative to “average,” with 1 being “strong” and 5 being “weak.” Out of the 25 companies it publicly evaluates, only the bankrupt Lehman Brothers’ Aurora Loan Services ranks as a 4, or “below average.”
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Moody’s vice president Bill Fricke said the generally average or better ratings of its clients reflect that only larger and more established servicers tend to commission ratings.
The unusual distribution of ratings came to American Banker‘s attention during research for a recent article on Carrington Mortgage Services. The Carrington Capital Management unit has pursued certain unorthodox strategies, such as holding on to foreclosed homes for long periods of time, that some investors allege benefit its holdings of bottom-ranked securities in deals it services. Carrington has argued in court documents that the interests of its holdings “may be adverse” to other investors’, and the company is being sued by the state of Ohio for unworkable modifications and “incompetent, inadequate and inefficient customer service.” Carrington has offered an extensive defense of its practices, which it asserts are in the interests of the trusts it serves as a whole.
Two ratings agencies evaluate Carrington, S&P and Fitch, though S&P has not made its evaluation public.
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In its public rating of Carrington, however, Fitch cited neither investors’ allegations nor Carrington’s rebuttal. In December, Fitch issued a “proficient” rating for Carrington and praised the company’s “experienced management team and capable default-handling practices.”
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“Carrington’s ’3′ ranking denotes the lowest acceptable stand-alone servicer ratings in Fitch’s scale and is in part due to its unorthodox loss mitigation and liquidation strategies,” said Fitch managing director Diane Pendley in the e-mail.
Asked to reconcile that statement with the complimentary language in its public servicer quality rating materials, Fitch offered no additional comment.
“I don’t know how they could have possibly missed this,” said Amherst Securities analyst Laurie Goodman, who argues that Carrington’s actions have harmed investors. “This is something that the market has been aware of for years. You look at Carrington’s capitalization mod rate, and it just flashes, warning, warning, warning.”
Posted on March 1, 2011
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