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MBS Ratings and the Mortgage Credit BoomAdam B. AshcraftFederal Reserve Bank of New York Paul Goldsmith-PinkhamFederal Reserve Banks - Federal Reserve Bank of New York James I. VickeryFederal Reserve Bank of New York May 14, 2010 FRB of New York Staff Report No. 449 European Banking Center Discussion Paper No. 2010-24S CentER Discussion Paper Series No. 2010-89S Abstract: We study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.
Number of Pages in PDF File: 59 Keywords: Credit Rating Agencies, Subprime Crisis, Mortgage-Backed Securities JEL Classification: G01, G21, G24 working papers seriesDate posted: May 25, 2010 ; Last revised: August 29, 2010Suggested CitationContact Information
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