Due diligence, liquidity key to credit market unfreezing
NEW YORK (Reuters) - Further deterioration of global credit markets can be avoided if ratings agencies perform more due diligence on loans that are securitized and liquidity returns to the secondary market, a panel of financial services executives said on Monday.
"The models at the ratings agencies did not work and they did not appropriately price the risk inherent in the underlying mortgages that were being securitized," Michael O'Hanlon, senior managing director at Marathon Asset Management LLC, said on a panel hosted by the Office of Thrift Supervision.
"People trusted the ratings agencies and it is very clear that their models were obviously wrong," he said. "More due diligence should take place going forward to avoid further problems."
The National Housing Forum was held at The National Press Club in Washington and broadcast by CSPAN.
"The ratings agencies are among the most powerful unregulated companies," said Rod S. Dubitsky, managing director at Credit Suisse First Boston. "Investors want to see results of their due diligence."
Adequately pricing securities not backed by government-sponsored enterprises Fannie Mae (FNM.N) and Freddie Mac (FRE.N) is next to impossible right now, the panelists said.
Fannie Mae and Freddie Mac hold charters to promote home ownership for low- and moderate-income Americans. They have seen increased business this year as lenders unable to find alternative funding have turned to them.
"You cannot create a good solid loan right now and sell it into capital markets," said Thomas Zimmerman, managing director at UBS Warburg, LLC. "Unless we have some sort of Katrina-type loan bailout, it will probably continue for a while," he said.
Marshall Haines, principal at TPG Capital, said in order to accurately price securities backed by mortgages, the secondary market needs to return to health.
"In order to accurately mark securities on your balance sheet today, you have to have a trade," he said. "Until we get secondary trading back, you will not know what the accurate market price is, so we need to get buyers and sellers back together."
A proposal spearheaded by the U.S. Treasury that would prevent scheduled mortgage payment increases from causing defaults was generally supported by the panel.
The Treasury and mortgage industry executives are working on details of the plan, which would freeze interest rates on some subprime mortgages for up to seven years.
(Reporting by Julie Haviv; Editing by Dan Grebler)
