The need for credit rating agency reform

The New York Times published an interesting article today, and an Op-ed yesterday raising the question of how the credit rating system can be improved to avoid the problem of over-inflated ratings, which helped cause the current recession. The NYT article asks why Warren Buffet hasn't spoken up about credit rating agency reform- considering that he is normally vocal about his views on the causes of the financial crisis and its potential solutions and his company owns 20% of Moody's. That company, along with Standard and Poor's, has been criticized for its role in fraudulently inflating the credit ratings of mortgage backed securities.

I like this analogy that Frank Partony, a University of San Diego Law Professor, used to explain the role of credit rating agencies in the housing market collapse:

“Imagine if you had a rabbi and said, ‘All the laws of kosher depend on whether this rabbi decides if food is kosher or not . . . If the rules say ‘You have to use this rabbi,’ he could be totally wrong and it won’t affect the value of his franchise.”

The rating agencies have been mislabeling the goods for a long time. “A lot of investors have been eating pork recently,. . . and they’re not too happy about it.”

Hopefully as Congress overhauls the federal financial regulatory scheme, this important piece of the puzzle will not be left out.

Housing Plan Moves Forward

The House passed the cramdown bill, which would allow bankruptcy judges to treat mortgages on a primary residence the same way they treat all other secured loans (except that it will only apply to loans made before January 1 2009).

Maybe this will add some teeth to Obama's plan to encourage voluntary loan modifications and reduce foreclosures.

Cramdown

The Hill reports that the House of Representatives has delayed a vote on legislation that would allow bankruptcy judges to modify mortgages on a borrower's home. It seems that lawmakers are feeling the pressure from mortgage lenders to wait and see how voluntary loan modifications work before amending the bankruptcy code. My thoughts are that this change is bound to happen eventually, and will be able to prevent more foreclosures the sooner that it is implemented.

I'm not sure what the latest news is on a proposed amendment by Illinois Representative Biggert that would limit access to the bankruptcy courts for immigrants other than citizens and green card holders. There is a brief description of the amendment on the Fair Immigration Reform Movement blog. It doesn't seem to be getting much press coverage- hopefully this means that its not being taken seriously by other lawmakers.