The most common statement credit ratings agencies hear from investors regarding their appraisals is a lack of confidence in the firms’ opinions on private-label residential mortgage-backed securities transactions.
Nonetheless, credit ratings agencies say they’re well aware investors have lost confidence in their ratings given that nonagency RMBS is still feeling the aftermath of pre-crisis deals, panelists acknowledged during the Mortgage Bankers Association Secondary Conference on Monday.
As a result, many investors have taken their own approach to deals and have gone as far as issuing their own appraisals, said Trez Moore, managing director for the Royal Bank of Scotland (RBS).
“I’m not trying to explain whether investors are right or different in their decision because it’s a natural reaction to the last several years of the securitization market,” Moore said.
As the private-label sector continues to gain traction— expected issuance will hit between $15 billion and $20 billion this year — the credit ratings agencies are hopeful investors will regain confidence in their ratings.
Nonetheless, investors still care to a certain extent whether there is a rating on a nonagency RMBS deal because they can hypothesize the rating on the bonds and decide if the deal poses enough attractive risk to invest in, Moore explained.
Post crisis, the credit ratings agencies have made it a priority to improve transparency on their ratings of deals to investors, said Kathryn Kelbaugh, vice president and senior analyst for Moody’s Corporation.
As a result, the best approach investors can take is to make their own appraisal of a deal, contrast and compare their opinions with the credit ratings agencies and make the best judgment call of whether to invest in the deal or not.
While all panelists agreed that investors are cautious when it comes to confidence in credit ratings firms, the ratings are needed to provide efficient execution.
Peter Sack, managing director for Credit Suisse (CS) — one of a handful of issuers in nonagency RMBS — used prime jumbo loans as a key example of investors still relying on ratings.
“There are a lot of regulatory issues still at hand, but you’ll still see prime jumbo loans getting rated to entice investors into becoming ‘AAA’ buyers,” he said.
In general, many panelists agreed that the deals being offered to investors by issuers in nonagency RMBS are “the best you will ever see in this market.”
Still, investors remain apprehensive about getting skin back in the game of private-label RMBS until they are quite certain that the sector is indeed going to bring in capital.
