The Securities Exchange Commission (SEC) and the White House are considering instituting a separate ratings system for structured debt investments. Covered products would include collateralized mortgage obligations (CMO) and commercial mortgage backed securities (CMBS) and other mortgage derivatives.

As a professional in the commercial real estate finance industry and a former officer at one of Wall Street’s largest investment banks, I do not support the changes as proposed.
The Real Estate Round Table, the Mortgage Bankers Association, the National Association of Realtors and the Commercial Mortgage Securities Association also oppose the idea.

Originating commercial mortgage loans is the biggest part of the business of our firm. The liquidity crisis in the mortgage backed bond market has paralyzed the banking system. Now is not the time to further muddy the waters by making wholesale changes in the way investors evaluate income producing securities.

I, along with most other professionals and trade groups, do support transparency and full disclosure as-to mortgage debt, but feel that different ratings platform for different types of bonds will confuse investors and make their investment decisions more difficult and time consuming.

Ratings should apply to an issuing entity’s ability to make interest and principle payments when due. They need not single out a type of paper for special scrutiny because the collateral that backs it is currently out of fashion. If a ratings agency perceives heightened risk in mortgage backed bonds due to the current credit situation, they are free to mark an issue down accordingly. This can certainly be done within the current and familiar ratings structure. A new system is wholly unnecessary.

Regulatory meddling in the mechanisms of the bond market at this juncture in the crisis carries a real danger of doing more harm than good. Taking the time to design, test, implement and teach the new system could very well slow any bond market recovery that might be on the horizon.

There is no question that the rating agencies such as Fitch, Standard & Poors, Moody’s and Duff & Phelps, dropped the ball during the build up to the mortgage melt-down. They must answer for past ratings that gave false security to debt buyers. All significant players in the ratings game are reviewing and revamping their analysis and scoring methods. If they didn’t they would no longer be credible and they would lose business. Their institutional clients and the public investors are demanding that they do a better job, and the agencies are responding. This is as-it should be in a free market economy.

The SEC and the Bush administration need to take a go-slow approach and only step in if they truly fail to reform on their own.