Boston Fed chief critical of mortgage rating system
Eric Rosengren, head of the Federal Reserve Bank of Boston, said this morning that fundamental changes may be needed to the Wall Street ratings system that gave investors the confidence that mortgages were safe investments.
The mortgage boom was fueled by the willingness of investors to give money to mortgage companies in exchange for a share of the future cash flow as borrowers repaid their mortgage loans. Investors specifically invested in large pools of loans called mortgage-backed securities. Ratings agencies told investors which pools were the safest investments by assigning letter grades such as AAA.
Rosengren said the ratings may have inspired false confidence because bonds comprised of loans to home owners were rated on the same scale as bonds comprised of loans to corporations. That fostered the misleading impression that mortgage bonds and corporate bonds that received the same rating were equally likely to repay investors. We now know mortgage bonds were much riskier.
"Maybe we shouldn't use the same ratings system for each of these different kinds of securities," Rosengren said.
He spoke at the South Shore Chamber of Commerce Economic Breakfast in Quincy, known as the "7:44" because that's when it starts.
(By Binyamin Appelbaum, Globe staff)