Mortgage-backed securities are back, but Moody's, Standard & Poor's, and Fitch are approaching their job rating them with very different tactics.
What would happen in an earthquake?
The big three credit rating agencies are in trouble for not taking taking risk seriously enough when they examined bonds made from residential mortgages before the housing market crashed. They've been roundly criticized for their overly generous assumptions about housing market hazards (Prices go down? No way!), and for the abysmal way that AAA-rated, mortgage-backed bonds performed during the financial meltdown.
Now it looks like those same agencies are arguing to see who can be the toughest on those very same securities.
Redwood Trust (RWT) is getting ready to bring to market a $290.4 million residential mortgage-backed security. It's called Sequoia Mortgage Trust 2011-1, and among other things it features a top AAA rating from Fitch. But in the prospectus filed with the Securities and Exchange Commission, Redwood mentions that it had "terminated" its request for Moody's to rate Sequoia because Moody's thought the loans in the pool were riskier than Redwood thought they were. Moody's wanted a 10% subordination level in order to stamp the deal with an AAA rating. (Think of subordination as a protective cushion should mortgages in the pool start going bad). Fitch agreed with Redwood that a 7.5% subordination level would be fine.