U.S. legislators will quiz rating agencies-Senator

BRUSSELS, Aug 20 (Reuters) - U.S. legislators will ask rating agencies why they made "mind-boggling" decisions to award investment grades to questionable mortgage-backed securities, the leading Republican on a Senate committee said on Monday.

Richard Shelby, the ranking member of the Banking, Housing and Urban Affairs Committee, said this would help them decide whether any new regulation was needed.

"There will be hearings..., there will be calls for more regulation," Shelby told a news briefing in Brussels. "My first thought is let's not overregulate the market, the market will regulate itself."

However he said credit rating agencies would have to bear more responsibility in the future in assigning financial health ratings, and the market should be more transparent when it came to revealing exactly who bears investment risk.

"How did they reach the conclusion that these packages of subprime questionable loans could be deemed ... investment rate bonds?" he said. "It's just mind-boggling."

Shelby said banks would increase their mortgage rates in the coming weeks, exacerbating a credit crisis that has snowballed in recent weeks as defaults on risky U.S. subprime mortgages hit banks across the globe.

"I think it will get worse before it gets better," he said. "There will be firms that will not survive, I don't think we should bail them out."

He welcomed the Federal Reserve's cut in the discount rate that governs direct loans to U.S. banks on Friday by a hefty half point to 5.75 percent, noting the Feb was ready to act further should the need arise.

"I think our economy can absorb it, if our regulators ... work this right, including our central bank, the Fed, and the European (Central) Bank. You have to have liquidity in the banking system," Shelby said.

The Republicans are the minority party in the Senate.