MBS Ratings and the Mortgage Credit Boom - Federal Reserve Bank of New York

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Staff Reports

MBS Ratings and the Mortgage Credit Boom

2014 May 2010 Number 449

JEL classification: G01, G21, G24

Authors: Adam Ashcraft, Paul Goldsmith-Pinkham, and James Vickery

We study credit ratings on subprime and Alt-A mortgage-backed-securities (MBS) deals issued between 2001 and 2007, the period leading up to the subprime crisis. The fraction of highly rated securities in each deal is decreasing in mortgage credit risk (measured either ex ante or ex post), suggesting that ratings contain useful information for investors. However, we also find evidence of significant time variation in risk-adjusted credit ratings, including a progressive decline in standards around the MBS market peak between the start of 2005 and mid-2007. Conditional on initial ratings, we observe underperformance (high mortgage defaults and losses and large rating downgrades) among deals with observably higher risk mortgages based on a simple ex ante model and deals with a high fraction of opaque low-documentation loans. These findings hold over the entire sample period, not just for deal cohorts most affected by the crisis.

Available only in PDF pdf

58 pages / 492 kb

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