New York sets rating agency fee reforms

By Martha Graybow and Walden Siew

NEW YORK (Reuters) - The three top credit rating agencies struck a pact with New York's attorney general on Thursday to change the way they charge fees for reviewing mortgage-backed securities, the latest development in a probe into the U.S. home loan industry.

The accord was reached with Moody's Corp's (MCO.N) Moody's Investors Service, McGraw-Hill Co's (MHP.N) Standard & Poor's and Fimalac SA's (LBCP.PA) Fitch Ratings.

It is aimed at increasing the independence of ratings agencies, which have been criticized for helping fuel the U.S. subprime mortgage crisis by assigning high marks to risky securities that later tumbled in value.

The pact is aimed at altering the way ratings firms are paid. New York Attorney General Andrew Cuomo said that under the old fee system, the agencies had a financial incentive to assign high ratings because they only received fees if a deal was completed. Under the agreements, the firms will receive payments for service even if a deal is not completed.

"These are reforms that are going to have a dramatic effect on the market," Cuomo said at a news conference unveiling the agreement. Top executives at the three ratings firms stood by his side when the agreement was announced.

Cuomo, who served as U.S. secretary of Housing and Urban Development under President Bill Clinton, has been looking into Wall Street's role in the subprime mortgage crisis since last year.

He said his office has now resolved its probe of the raters' fee practices, and that all three firms had signed a cooperation agreement to help in his ongoing investigation of the mortgage loan industry.

"The mortgage crisis currently facing this nation was caused in part by misrepresentations and misunderstanding of the true value of mortgage securities," Cuomo said in a statement.

The reforms attempt to address the widespread criticism of the fee structures of ratings firms, which are paid by the entities being assessed. Critics say they do not think the changes will amount to sweeping reforms.

"From a practical matter, it changes nothing. When you get called by an investment bank, now instead of one check being cut, there may be two," said Sean Egan, co-founder of independent rating firm Egan-Jones Ratings, a long-time critic of the major credit raters.

"Breaking up the fee structure does nothing to address the underlying problem, which is skewed incentives," he said.

In addition to changing the fee structure, the firms also will require investment banks to provide more detailed data on loan pools for reviews prior to the issuance of ratings.

Representatives of the three credit raters said the pact was an important step in restoring investor confidence in credit ratings.

S&P "remains steadfast in our commitment to transparency, openness, and strengthening the governance of the ratings process, and we are pleased these principles lie at the heart of today's agreement," S&P President Deven Sharma said in a statement.

Fitch President and CEO Stephen Joynt said "we believe this agreement contains a number of specific and constructive steps that Fitch and all rating agencies can take to improve the independence and transparency of credit ratings in the mortgage securitization markets."