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Rating Agency Scrutiny

We are all under pressure each and every day to be the best that we can be. And with all this new regulation, that goes double for lenders and servicers. I just heard that Fay Servicing, a special servicer that manages performing, at-risk and distressed residential mortgages, has been evaluated and rated by agencies Fitch Ratings and S&P, independent research firms which provide ratings, commentary and analysis to organizations across the financial industry. Their technology played a hefty role in the rating agencys’ verdicts. Here’s what happened:

These ratings were partially determined based on the company’s use of a robust single point of contact (SPOC) system as well as the level of advanced servicing technology integrated into its operations. The results reflect the firm’s innovative relationship-based servicing approach which is driven by the staff’s extensive mortgage industry experience and highly developed borrower management skills. The ratings incorporate the general condition of the U.S. residential servicing industry, as well as the degree of difficulty in maintaining high performance standards given the rising cost of servicing and more demanding regulatory requirements. These ratings also highlight Fay Servicing’s business model, which facilitiates a high rate of positive resolutions for homeowners, while maintaining profitability for investors, banks and lenders.

The Fitch Residential Subprime and Special Servicer Ratings were RPS3 and RSS3, respectively, with “Outlook Stable” (proficient in overall servicing ability). The S&P Residential Mortgage Subprime and Special Servicer Rating was AVERAGE with a “Stable Outlook.”

“We are proud to have received these ratings especially at a time when the U.S. servicing industry continues to evolve in order to successfully face a variety of challenges associated with added regulations and changing market conditions,” said Ed Fay, chief executive officer of Fay Servicing. “These results validate that we’ve built a strong foundation for future growth, including securitizations, and that we will continue to responsibility and effectively serve homeowners, lenders and investors for years to come.”

Having heard that, you should be recognized as well for all the good things that you’ve done for the mortgage space this year. Now is your chance. Apply for free to be named a Top Innovation by PROGRESS in Lending HERE.

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The Dagong Show

*The Dagong Show*
**By Phil Hall**

new-PhilH***There is a good chance that you are unfamiliar with the Dagong Global Credit Rating Co. This Chinese credit rating agency is mostly unknown in the U.S., but it is already making significant inroads in other parts of the world, and there is no reason to believe that it will not have a major presence in the U.S. sometime in the near future. Personally, I am glad to see Dagong’s emergence because it offers the only serious challenge to three of the most conspicuous simians among the 800-pound gorillas that no one in the financial services orbit wants to acknowledge: the problematic U.S. ratings agencies.

****For the past five years, the role played by Standard and Poor’s (S&P), Moody’s Corp. and Fitch Ratings in the run-up to the 2008 economic crash has barely been acknowledged by the federal government and the mainstream media. Oh, yeah, Eric Holder’s Justice Department filed a suit against S&P earlier this year, but that is mostly seen as crass payback for the agency’s decision to downgrade the U.S. government’s credit rating in 2012 following the debt ceiling debacle – S&P’s pre-2008 actions were virtually identical to ratings offered by Fitch and Moody’s, but the latter two maintained Washington’s AAA rating in 2012 and were strangely spared the wrath of Holder. The credibility of the Holder campaign against S&P was further obliterated by his department’s decision to leak the news of the lawsuit to the Wall Street Journal before any legal documents were filed in court.

****For the most part, the three agencies have looked back at their disastrous ratings of toxic mortgage-backed securities, shrugged their shoulders, uttered an insincere “Oops!” and kept on trucking. Today, the relationship between this threesome and the U.S. financial services industry is a stale case of business-as-usual.

****Maybe it is time for the status quo to be shaken up. When the Chinese government began trumpeting Dagong as an alternative to the American credit rating trio in 2010, it called for more honesty and transparency in the credit rating process. No less a figure than Chinese President Hu Jintao announced the need for an “objective, fair and reasonable standard” that would “not be affected by ideology.”

****Of course, having Hu Jintao call for ideology-free fairness is equal to having Miley Cyrus advocate the importance of modest ladylike behavior – but even if the messenger was the wrong person, the message was still long overdue.

****In July 2010, Dagong first gave Washington an AA rating, which it downgraded to A+ with a negative watch four months later. That was eventually dropped to an A- and last month Dagong downgraded Washington’s credit rating further to an A, noting that the federal government was “still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future.” The U.S. credit agencies, in comparison, viewed the recent shutdown and debt ceiling crisis and left their ultra-high ratings of Washington unchanged.

****Needless to say, Dagong is not among the most favored entities in Obama’s Washington. The U.S. Securities and Exchange Commission will not provide it with Nationally Recognized Statistical Rating Organization designation, claiming that Dagong does not “comply with the recordkeeping, production, and examination requirements of the federal securities laws.”

****However, the view from across the Atlantic is somewhat different. In June, Dagong became the first Asian credit rating to receive approval from the European Securities and Markets Authorities, which gave the agency approval to provide services in the 27 European Union nations. Hmmm, what does Brussels know that Washington doesn’t?

****Dagong has also teamed up with Russia’s RusRating and an American entity called Egan-Jones to create the Universal Credit Rating Group (UCRG). How the UCRG will operate remains to be seen, but its arrival provides some much needed oxygen to the game.

****While Dagong is obviously not in a current position to overthrow the supremacy of S&P, Fitch and Moody’s, it has already chiseled out the first crack in their credit ratings supremacy. Ultimately, time will be Dagong’s ally – and in the none-too-distant future, the big three will have to scoot over and make room for a fourth player from across the Pacific. And if Dagong’s recent analysis of the Washington credit worthiness is any indication, it will offer some much needed honesty and frankness – which, on its own terms, is not something that often blows out of Beijing.

List Mania

*List Mania*
**By Lew Sichelman**

LewS***I don’t know about you, but I am sick and tired of all the “bests” and “worsts” and “mosts” and “leasts.” As in, the hottest housing markets, the slowest housing markets, the best college towns to buy real estate, the top ten cities for engineering innovation.

****Bert Sperling of Sperling’s Best Places once told a group of real estate reporters that he could come up with a list of the “best places” for just about anything. Thus, we have the best places to live, to retire, to work, to visit, to chill, to hyperventilate, to think, not to think, ad infinitum.

****And then we also have the fastest markets from flip to sale. I mean, gimme a break.

****Nope. No such luck. There’s the ten most exciting cities, the top ten markets in which to buy vacation homes and the 25 best places to flip.

****And then there’s the funniest cities (Ha!), the most over-valued, the most under-valued (or is that the least?), and our favorite summer towns.

****Wait, there’s more, as in the most secure largest cities, the most stressed cities, the most popular for the holidays, and the best baseball cities.

****I actually like that last one. But not the best for job growth, the worst for job growth, the healthiest – that’s fiscal health, not physical – and the ten best cities for NASCAR fans.

****Everybody, it seems, is enamored with lists. I haven’t seen the ten worst mortgage regulations yet, but I’m sure its out there – somewhere.

****And while we’re skewering this pig, how about all those indices we’re subjecting to each and every month, month after month after month. I’m tired of those, too.

****Why, everybody has one – or more. There’s Core Logic, Case-Shiller, LPS, the FHFA, the NAHB, Pro Teck, Redfin, etc., etc., etc. (This is not to single out any particular company; it’s  just to name a few. So please, everyone, don’t get your knickers in a wedgie.)

****It’s time to stop all this madness, these mindless veiled attempts to get your name up in lights. And I fault supposed news outlets which publish these lists — one after another after another, even though they hold little or no value — just as much, if not more, than their purveyors.

****Take the monthly catalogue of the housing markets with the fastest appreciation. Even the government publishes them. But they do consumers a disservice, for what’s happening in Bumdale has absolutely, positively nothing to do with what’s Bumberg.

****No, borrowers, buyers and sellers would be much better off knowing what’s going down – or up – in their communities, their neighborhoods, their very own blocks. Yet we continue to tell them that prices are up 11 percent in Bumville when what’s more meaningful is that values have slipped 2 percent on their street because it’s loaded with foreclosures or pig-pen neighbors.

****So, I, for one, say let’s stop this silliness. And the presses. Except for maybe a list of the ten worst offenders.

The SEC’s Non-Pursuit of Justice

*The SEC’s Non-Pursuit of Justice*
**By Phil Hall**

new-PhilH***At one point in my career, I found myself laboring at a small, shabby company where a hostile department manager decided one day that he did not like the quality of my work. To express his displeasure, he sent me a wildly hostile email that denigrated my work with foul language of an excretory nature.

****Not being one to take insults lightly, I forwarded the email to the company’s president, who was the manager’s superior. I pointed out the inappropriate nature of the email’s content, noting that it fell seriously afoul of corporate conduct policy as per the employees’ handbook. I asked for intervention in this matter and, perhaps foolishly, I had expected that some action be taken against this foul-mouthed manager. But nothing happened. But the company president ignored my complaint, and the department manager later arrogantly laughed at my umbrage by claiming that he was “justified” in using crude verbiage in his interoffice communications.

****I recalled this miserable anecdote upon learning that the U.S. Securities and Exchange Commission (SEC) will begin to require financial institutions to offer an admission of guilt as part of the agency’s civil settlements. Mary Jo White, the SEC chairwoman, told a recent Wall Street Journal CFO Network conference that this policy switch will be used where and when the agency believes it is justified.

****“We are going to, in certain cases, be seeking admissions going forward,” White said. “Public accountability in particular kinds of cases can be quite important, and if you don’t get them, you litigate them.”

********Also, let’s not forget the civil lawsuit brought by Eric Holder’s Department of Justice in February against Standard & Poor’s Rating Services (S&P), in which the Attorney General and his team insisted the rating agency engaged in improper practiced on its ratings of collateralized debt obligations in 2007. Of course, S&P’s ratings back in 2007 were the same as those offered by other rating agencies. The only difference between S&P and its peers was that S&P was the sole rating agency to downgrade the U.S. credit rating in the aftermath of the 2012 debt ceiling crisis – a history-making event that left the Obama administration with a sorry legacy and, it appears, a taste for revenge.

********The SEC’s promise of trying to milk an admission of guilt must not be seen as a new day in federal litigation. White supplemented her unexpected announcement with a coda that the longstanding habit of concluding settlements without an admission of guilt will continue to be a “major, major tool” in how the SEC deals with suspected lawbreakers. If I was a betting man, I would wager that will be the only tool at play as long as White (a former Wall Street attorney) stays at the SEC steering wheel.

****But why should that be a surprise? Whether in a crummy workplace or in a crummy government, the failure of those in power to serve justice with intelligence will send the signal that the enforcement of rules is strictly a casual affair, and that anyone holding their breath in expectation of serious justice brought against blatant wrongdoers will wind up asphyxiating themselves.

****Mercifully, I could escape that aforementioned horrible job, and not a moment too soon – the foul-mouthed manager took me into his salty confidence by telling me that the company’s revenues were “sinking like the [bleeping] Titanic” – and I took that cue by getting into a career lifeboat and sailing to safety before the company began its fatal descent. Alas, escaping from the realm of a federal judiciary process that will not do its job is a lot more challenging, and in this case everyone is going down with the ship of state.