A Senate banking committee hearing  regarding the turmoil in U.S. credit markets and the role of the credit rating agencies was held this afternoon. Senator Christopher Dodd (D-Conn.) and Senator Richard Shelby (R.-Ala.) were there to question Securities and Exchange Commission Chairman Christopher Cox regarding the SEC's examination of a number of reforms for rating agencies.

Yesterday the Real Estate Roundtable, the Mortgage Bankers Association  the Commercial Mortgage Securities Association, and the National Association of Realtors wrote Senators Dodd  and Shelby regarding their concern over and opposition toward proposals to differentiate between credit ratings for structured finance products and other asset classes, such as corporate and municipal bonds.

The letter was specifically a response to the policy statement on financial market developments issued in March 2008 by the President’s working group of financial markets that calls for “…changes to the credit rating process that would clearly differentiate ratings for structured products from ratings for corporate and municipal securities.”

The groups said that they are concerned that differentiating ABS from corporate and municipal bonds will further undermine, and not restore, liquidity that is a key factor in a borrower’s access to credit.

The associations cited Moody’s Investors Service's recently requested for comment related to this issue that said, “… credit ratings are forward-looking opinions that address just one characteristic of fixed income obligations, an assessment of the likelihood such obligations will be repaid in accordance with their terms.”  According to the letter, the different industry groups agreed with this evaluation of the definitional scope of a rating and would discourage any departure from this concept.

In the letter, the groups said that educating investors about the inherent risk factors associated with all categories of securities, both structured and non-structured, would get greater long-term liquidity compared with isolating structured securities for a separate rating scale in such a broad and simplistic manner.

"This approach would address, in a much more appropriate and comprehensive manner, the risk factors associated with each category of securities," the industry groups said.

They strongly believe replacing or modifying the existing ratings scale would result in greater market volatility and investor confusion.

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