A blistering critique from Moody's Investor Service Inc. of rating practices for commercial securitizations has prompted calls from mortgage bankers for more scrutiny and regulation of the national rating agencies, and the result could be onerous new legislation for these firms.

Moody's issued a special comment Nov. 1 that faulted the securitized commercial real estate rating process employed by some agencies and warned of a "marked deterioration in the credit quality of commercial mortgage-backed securities" that has become prevalent in the "feeding frenzy" of the rapidly growing market.

Mortgage bankers, who are strong supporters of a House bill that would create a secondary market for commercial real estate, are working closely with Congress to ensure all conditions for their entry into the potentially lucrative market are perfect. Talk of inaccurate ratings and increased potential risk, however, has them disquieted.

"There is a legitimate concern with credit quality." said John Ferber, senior vice president and chief of the Mortgage Bankers Association's commercial real estate finance division. "And I'm sure that at some point [Congress will] get involved - I believe the MBA will look for it, too. With the thrift flasco fresh in everyone's mind, they won't allow anymore unnecessary risks."

The Moody's comment, The Feeding Frenzy in Commercial Real Estate and Its Impact on Credit Quality, indicated a noticeable increase in the number of requests the agency has received to rate transactions that are poorly structured and have collateral and documents inconsistent with the high-grade ratings being pursued.

"In the rush to sell securities into a yield-hungry market, Moody's has been asked to conduct its assessment of these less-secure transactions in a time frame that is wholly inconsistent with the thorough analysis necessary to evaluate their risks and complexities," the report said.

But while Moody's believes it is raising a red flag to potential risk, other rating agencies say the risks are more of a red herring.

"We strongly disagree with their views," said Jim Titus, director of the real estate finance group at Standard and Poor's Corp. He added that Moody's, which suffers from a shortage in commercial real estate raters on staff, hasn't been able to conduct as many assessments because it simply doesn't have the manpower.

As far as rating less-secure transactions in a short time frame being inconsistent with the thorough analysis necessary, Titus said that it "may be true for them," but that in S&P's case, the agency - with a staff of 20 raters compared to Moody's, which hopes to expand to eight by the end of the year - has created a backlog of 100 deals and was handling them at a self-designated pace. He also maintained that the ratings assigned to each were accurate.

S&P wasn't the only participant contending that Moody's analysis is based on staffing shortfalls.

"I don't see how they can say [it's not because they don't have the staffing]," said one market participant. "We hear from the bankers who tell us there is no one [at Moody's] to do the deal. Some agencies are just conservative, while some are conservative because they have to be. They [Moody's] are in the latter category."

While the rating furor intensifies, the House bill - the Business, Commercial and Community Development Secondary Market Development Act, H. R. 2600 - was quietly marked up by the Subcommittee on Economic Growth and Credit Formation and is headed for the full House.

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