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Trade Associations Warn Against Ratings Proposals

Trade associations with an interest in the commercial mortgage-backed securities market say recommendations on structured finance ratings from a government body set up to examine underlying causes of turmoil in the financial markets could potentially undermine liquidity and access to credit.

The President’s Working Group on Financial Markets stated in March that greater transparency is desirable for structured finance ratings. It recommended that the credit ratings agencies reform their rating processes for structured credit products to ensure “integrity and transparency.”

The working group also recommended that the agencies change the process to clearly differentiate credit ratings for structured products from ratings for corporate and municipal securities.

However, George Green, a senior director for commercial and multifamily for the Mortgage Bankers Association, says the MBA opposes the differentiation. The changes would “create more confusion than anything else,” says Green, who also notes that investors have indicated that the changes would create operational difficulties for them.

One recommendation would create a separate nomenclature, such as adding an “SF”, or structured finance, notation to differentiate structured finance ratings from those for corporate and municipal bonds. Another proposal by the working group would set up a separate ratings scale and add detail on structured finance bonds.

But in a joint statement expressing concern about the recommendations, the Real Estate Roundtable, the MBA, the Commercial Mortgage Securities Association, and the National Association of Realtors say that differentiating structured asset-backed bonds from corporate and municipal bonds will “serve to further undermine — rather than restore — liquidity that is a key factor in a borrower’s access to credit.”

The associations also note that regulatory capital requirements for commercial banks under international Basel II standards for financial reporting are based on the current ratings methodology, and that any ratings changes would require a change for some banks. “Unfortunately, these unintended consequences would increase costs for investors and further erode liquidity that is critical to the extension of credit for borrowers,” the associations say.

This summer, the Securities and Exchange Commission is scheduled to release a copy of the proposals and seek public comment. Depending on the scope of change, the SEC could potentially put the proposals into effect before this fall. If the proposed changes fall beyond the scope of the SEC’s authority, the SEC would require additional government authorization, which could take up to a year to complete.

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