Foreclosure fight targets rating agencies

Ohio has one of the highest foreclosure rates in the nation.

COLUMBUS (AP)— Pressure on credit-rating agencies for any role they may have played in a burgeoning mortgage market crisis intensified Friday, as federal regulators joined attorneys general in Ohio and elsewhere in investigating how the industry handled borrowers with weak credit.

A review by the U.S. Securities and Exchange Commission will include what ratings mean and whether conflicts of interest were created if rating agencies gave advice to issuers of mortgage debt and originators, the agency said.

Critics of the three biggest ratings agencies — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — say they failed to give investors adequate warning of the risk posed by mortgage securities. The agencies were also vulnerable to conflicts of interest because they are paid by the companies whose bonds they rate, critics charge.

Ohio Attorney General Marc Dann launched a task force in February to investigate unscrupulous lending practices in the state, which has one of the highest foreclosure rates in the nation. In connection with the investigation, he sued 10 mortgage lenders in June, accusing them of pressuring real estate appraisers to inflate home values.

“We’re looking at everybody involved in subprime lending especially. That includes all the credit rating agencies, mortgage companies,” Dann said. “We’re going to hold everybody accountable.”

Dann is among a number of attorneys general, including New York’s Andrew Cuomo, who are attempting to build legal cases against the powerful ratings agencies, whose ratings are used by investors to gauge the riskiness or safety of mortgage-backed bonds and other forms of debt.

Subject to oversight

The agencies, which have said they will assist regulators in their examinations, are subject to SEC oversight enacted last year.

“Originally, the bond rating agencies and the credit rating agencies had different roles, but as the stakes have gotten higher their roles have become entangled,” Dann said.

He said he has four lawyers working on the issue full-time and has hired outside counsel to help, but he hopes the federal Securities and Exchange Commission investigation will eventually lead to the agencies facing stiffer regulation.

“If the credit rating agencies are held accountable for what they do in the future, or if they’re regulated by the SEC in some way, they would be less likely to engage in the symbiotic relationship they’ve enjoyed with the banks and the bond houses,” said Dann, a Democrat.

A near national crisis regarding subprime mortgage lending has finally prompted the appropriate response from policymakers, said Zach Schiller, policy director for Policy Matters Ohio, a Cleveland-based economic research organization.

A recent study conducted by his organization found that the growth rate for foreclosures in Cuyahoga County — home to Cleveland, one of the nation’s most impoverished big cities — is higher in inner- and outer-ring suburbs than in the city itself.

“As much as I think that [investigating rating agencies] is well deserved, I wouldn’t want them to be the only ones to get this type of attention,” he said. “There are a lot of other players involved here: brokers, lenders, Wall Street firms, rating agencies. That whole chain really needs to be looked at.”

A task force appointed by Ohio Gov. Ted Strickland to study the foreclosure issue expects to release its final recommendations Monday.