- The Washington Times - Tuesday, August 21, 2007

BRUSSELS (AP) — The U.S. home-loan crisis is going to get worse before it gets better, a member of the Senate banking committee said yesterday, claiming that U.S. credit-rating agencies bear some responsibility for the mortgage-industry debacle.

Sen. Richard C. Shelby of Alabama, the senior Republican on the Banking, Housing and Urban Affairs Committee, said hearings likely this fall may look into possible conflicts of interest, since the agencies are paid by the same banks whose debts they rate for resale.

Standard & Poor’s Corp., Moody’s Investors Service Inc. and Fitch Ratings have all come under increased scrutiny because of ratings given to mortgage-backed securities.

“The credit-rating agencies have played a central role in the subprime debacle. I think they have to shoulder some responsibility here,” he said. “How could they claim these loans, once they were packaged, were investment grade? A lot of people bought them because of the ratings they gave them.”

Mr. Shelby’s comments to reporters in Brussels follow comments Friday by Sen. Christopher J. Dodd, Connecticut Democrat, who is chairman of the committee.

Mr. Dodd expressed “great concerns” about the role of credit-rating agencies in the mortgage-market crisis and said, “We need to have a thorough examination of that.”

Banks across the world have already become far more cautious about lending after a sharp climb in the number of people with little or poor credit history who have defaulted.

To ease the credit crunch, the Federal Reserve last week cut its discount rate, the interest rate that it charges on loans to banks, to 5.75 percent from 6.25 percent. Central banks in Europe, Japan and Australia had already injected billions into the banking system.

The European Commission said yesterday that financial markets appeared to be more calm after stock exchange plunges last week. But EU spokeswoman Amelia Torres said it was too soon to say what effect the crisis would have on the EU economy, which only recently picked up pace after years of little growth.

The subprime crisis has highlighted how the global financial system has changed. Banks that used to hold the loans they authorized now repackage them and sell them to others, allowing investors across the world to take on the risk. A rash of bad mortgages in the U.S. now has the potential to bring down banks in Germany or South Korea.

Mr. Shelby told reporters in Brussels that the rising number of defaults on loans will be exacerbated in the next three to five months as repayment rates on many loans granted in 2005 and 2006 rise after initial fixed-rate periods.

“A great percentage of the subprime loans were made … two years ago, ‘05 and ‘06,” he said. “As those loans go up, the chances of them becoming non-performing … will be much greater.”

“I think you are going to have a problem. The question is: Can a lot of loans be worked out ahead of time, ahead of the crisis. Will the lenders be willing to do this, and who’s holding the debt too? I don’t know who’s got it. It’s not the local bank,” he said.

Mr. Shelby called for more transparency within the financial system to make clear who holds the risk.

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