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THE BUST
banks would originate “a bad mortgage because they thought the government policy
allowed it” unless the bank could sell off the mortgage to Fannie or Freddie, which
had their own obligations in this arena. He said, “It’s hard for me to answer. If the rea-
son the regulators didn’t jump up and down and yell at the low-doc, no-doc sub-
prime mortgage was because they felt that they, Congress had sort of pushed in that
direction, then I would say yes.”
“You know, CRA could be a pain in the neck,” the banker Lewis Ranieri told the
FCIC. “But you know what? It always, in my view, it always did much more good
than it did anything. You know, we did a lot. CRA made a big difference in communi-
ties. . . . You were really putting money in the communities in ways that really stabi-
lized the communities and made a difference.” But lenders including Countrywide
used pro-homeownership policies as a “smokescreen” to do away with underwriting
standards such as requiring down payments, he said. “The danger is that it gives air
cover to all of this kind of madness that had nothing to do with the housing goal.”
RATING DOWNGRADES: “NEVER BEFORE”
Prior to , the ratings of mortgage-backed securities at Moody’s were monitored
by the same analysts who had rated them in the first place. In , Nicolas Weill,
Moody’s chief credit officer and team managing director, was charged with creating
an independent surveillance team to monitor previously rated deals.
In November , the surveillance team began to see a rise in early payment de-
faults in mortgages originated by Fremont Investment & Loan, and downgraded
several securities with underlying Fremont loans or put them on watch for future
downgrades. “This was a very unusual situation as never before had we put on watch
deals rated in the same calendar year,” Weill later wrote to Raymond McDaniel, the
chairman and CEO of Moody’s Corporation, and Brian Clarkson, the president of
Moody’s Investors Service.
In early , a Moody’s special report, overseen by Weill, about the sharp in-
creases in early payment defaults stated that the foreclosures were concentrated in
subprime mortgage pools. In addition, more than . of the subprime mortgages
securitized in the second quarter of were days delinquent within six months,
more than double the rate a year earlier (.). The exact cause of the trouble was
still unclear to the ratings agency, though. “Moody’s is currently assessing whether
this represents an overall worsening of collateral credit quality or merely a shifting
forward of eventual defaults which may not significantly impact a pool’s overall ex-
pected loss.”
For the next few months, the company published regular updates about the sub-
prime mortgage market. Over the next three months, Moody’s took negative rating
actions on . of the outstanding subprime mortgage securities rated Baa. Then, on
July , , in an unprecedented move, Moody’s downgraded subprime mort-
gage-backed securities that had been issued in and put an additional securi-
ties on watch. The . billion of securities that were affected, all rated Baa and lower,
made up of the subprime securities that Moody’s rated Baa in . For the time
