Vickie A. Tillman, Executive Vice President of Standard & Poor’s Credit Market Services and head of Rating Services testified on September 26, 2007 before the US Senate Committee on Banking, Housing and Urban Affairs in conjunction with the subprime mortgage loan crisis.  BIIA has received the transcript of this testimony.  Below is a condensed excerpt of statements made by S&P.

“S&P stated that it had learned hard lessons from the recent difficulties in the subprime mortgage area.  S&P fully agreed with the recent statement of Treasury Secretary Paulson’s observations that “the subprime mortgage market improved access to credit and homeownership for millions of Americans,” it appears that abuses may have occurred in the origination process.  S&P support Congressional efforts to investigate those abuses and to prevent their reoccurrence.  S&P pointed out that it does not rate the underlying mortgage loans made to homeowners or to evaluate whether making those loans was a good idea in the first place.  Originators made the loans and performed due diligence.  In turn, issuers and arrangers of mortgage-backed securities bundle those loans and perform due diligence.  These issuers set transaction structures, identify potential buyers for the securities, and underwrite those securities.  For the system to function properly, S&P relies, as it must, on these participants to fulfill their roles and obligations to verify and validate information, before they pass it on to others, S&P included.  S&P was fully aware that for all its reliance on analysis of historically rooted data, that sometimes go as far back as the Great Depression, some of that data proved no longer to be as useful or reliable as it has historically been and that the collapse of the housing market itself has been both more severe and more precipitous than S&P had anticipated.  S&P also stressed unprecedented change in credit behavior of mortgagees.  The level of early payment default trends in recent subprime loans had not occurred before.  Individuals who purchased homes generally made mortgage payments, before paying off their credit card debt, that notion does no longer to be true to the extent is once was.  One interesting aspect from the testimony is that S&P relied on 70 different types of input as well as FICO scores (which S&P classifies as an industry standard) to monitor the credit quality of the portfolio.  The lessons learned from this episode are that in spite of these safeguards the credit climate shifted more quickly than previously experienced. “

S&P stated “there is no doubt that subprime loans made from late 2005 through at least early 2007 are behaving very differently from loans in prior periods, even when the loans share the same characteristics.” “There are a number of anomalies that make more problematic applying a number of historically-rooted assumptions about the behavior of borrowers.”  To counter criticism about the lack of early warning, S&P stated that it has been warning the market, and taking action to tighten its criteria in response to deterioration in the subprime market since early 2006.               Source: Government Affairs Office McGraw-Hill Companies

BIIA Newsletter November – 2007 Issue