The government is planning to require that preliminary ratings on securitized loan pools be disclosed in registration statements — a move opposed by mortgage bankers.
The Mortgage Bankers Association outlined its concerns yesterday in a letter to Securities and Exchange Commission Secretary Elizabeth M. Murphy.
The Washington, D.C.-based organization said a pending SEC rule would amend registration statements filed under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and Forms 8-K and 20-F.
Under the proposed rule, registrants would be required to disclose preliminary ratings on mortgage-backed securities, according to the letter. Such a move is intended to prevent ratings shopping — where multiple ratings agencies are solicited for preliminary ratings with the assignment going to the agency with the highest rating.
But MBA is concerned that preliminary ratings do not accurately reflect the pool of loans ultimately securitized. With commercial MBS, the pool of properties can change substantially from the pool initially rated.
The trade group said that the CMBS model utilizes a first-loss component where specialized B-piece investors are in a first-loss position and perform loan-level due diligence on the loan pools. These investors bump some loans from the pools. The B-piece process, however, typically occurs only after the preliminary rating is issued.
In addition to a change in the composition of the loan pools between the initial ratings and the final rating, preliminary ratings are more cursory while final ratings are far more in-depth.
“This can result in significantly different ratings for the same pool of loans,” MBA stated. “Consequently, preliminary and final ratings should not be compared because they can potentially change significantly even if the loan pool is not modified.”
MBA instead is calling for increased transparency and noted that “the industry is already self-correcting.”
The association also opposes unique identifiers on MBS — which it claims will deter investments in all types of structured securities.
