Credit Ratings Failed to See Rising Risk in Mortgage Products
Although the credit rating agencies were aware of increased levels of mortgage fraud and lax underwriting, they did not factor that credit risk into their models.
Palm Coast, FL – April 23, 2010
Source: E Credit Daily
[April 23, 2010] The dominant credit rating agencies used risk models that turned out to be inaccurate, derived from faulty data on subprime, interest-only and other high risk mortgages that came to dominate the housing market, according to a Senate subcommittee’s report.
Throughout the buildup of the housing bubble, Moody’s and S&P boosted revenues substantially by rating securities backed by residential mortgages, and increasingly those mortgages were of the subprime variety, originated from borrowers with poor credit on homes that were overvalued.
“Although the credit rating agencies were aware of increased levels of mortgage fraud and lax underwriting, they did not factor that credit risk into their models,” found a report by the Senate Permanent Subcommittee on Investigations.
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