WASHINGTON (Reuters) - The head of the Federal Housing Finance Agency said on Wednesday he was concerned with conflicts of interests at credit rating agencies, which often help structure the same securities they rate.
“There was a lot of consulting fees that may have caused conflicts of interest at the institutions,” James Lockhart told the Reuters Global Financial Regulation Summit in Washington. “I think it is an issue that I think needs to be looked at.”
Lockhart heads the agency that oversees mortgage finance firms Fannie Mae and Freddie Mac, which relied heavily on credit ratings when buying securities linked to questionable mortgages.
Fannie and Freddie eventually had to be taken over by the U.S. government after losing billions of dollars when the housing market collapsed and the value of their investments deteriorated.
The largest rating agencies -- Moody’s Corp (MCO.N), McGraw-Hill Cos Inc’s MHP.N Standard & Poor’s and Fimalac SA’s LBCP.PA Fitch Ratings -- have been harshly criticized for not doing enough due diligence before assigning top ratings to mortgage-backed securities that later dropped in value.
“Everybody’s model blew up, no one had a mortgage model that worked two, three years ago because no one foresaw the drop in housing prices we had,” Lockhart said.
“Obviously (the credit rating agencies) need to improve their models. Now of course they have an event that makes it easier for them to have better models.”
The Securities and Exchange Commission has adopted rules to crack down on conflicts of interest at the rating agencies. Credit agencies are now banned from rating their own work and employees who help determine a credit rating are prohibited from negotiating any fees.
However, SEC Chairman Mary Schapiro has said more needs to be done and is contemplating further reforms to the industry.