MBS Ratings and the Mortgage Credit Boom

59 Pages Posted: 25 May 2010 Last revised: 29 Aug 2010

Adam B. Ashcraft

Federal Reserve Bank of New York

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York

James I. Vickery

Federal Reserve Bank of New York

Date Written: May 14, 2010

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.

Keywords: Credit Rating Agencies, Subprime Crisis, Mortgage-Backed Securities

JEL Classification: G01, G21, G24

Suggested Citation

Ashcraft, Adam B. and Goldsmith-Pinkham, Paul and Vickery, James I., MBS Ratings and the Mortgage Credit Boom (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. Available at SSRN: https://ssrn.com/abstract=1615613 or http://dx.doi.org/10.2139/ssrn.1615613

Adam B. Ashcraft

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

James Ian Vickery (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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