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U.S. SUES S&P, ALLEGING MORTGAGE RATINGS WERE INFLATED The U.S. Department of Justice (DOJ) filed a civil lawsuit against Standard & Poor���s (S&P) and its parent company, McGraw-Hill, last month alleging S&P ���knowingly [issued] inflated credit ratings��� for collateralized debt obligations (CDOs) in the years leading up to the financial crash, misrepresenting their creditworthiness and understating their risks. The department further alleges S&P ���falsely claimed that its ratings were independent, objective, and not influenced by the company���s relationship with the issuers who hired S&P to rate the securities in question��� when that was in fact not the case, according to federal officials. U.S. Attorney General Eric Holder, speaking at a press conference, said the DOJ identified more than $5 billion in losses to federally insured financial institutions resulting from CDOs rated by S&P between March and October 2007. During that period, nearly every mortgage-backed CDO rated by S&P failed. ���Put simply, this alleged conduct is egregious���and it goes to the very heart of the recent financial crisis,��� Holder said. He went on to note that findings from the department���s three-year investigation show as early as 2003, S&P analysts raised concerns about the accuracy of the agency���s rating system. Those warnings were ignored, Holder said. ���Even in 2007���when S&P���s internal data showed a severe deterioration in the creditworthiness of the RMBS [residential mortgage-backed securities] it had rated��� S&P allegedly continued to rate hundreds of billions of dollars��� worth of CDOs backed by RMBS collateral���ignoring their own analysts��� performance projections showing that the ratings on that collateral would not hold,��� the attorney general added. Holder was joined onstage by other DOJ officials and seven state attorneys general: Beau 14 Biden (Delaware), Kamala Harris (California), James Hood (Mississippi), George Jepsen (Connecticut), Lisa Madigan (Illinois), Tom Miller (Iowa), and Irvin Nathan (Washington, D.C.). In a release, S&P called the claims ���erroneous��� and insisted its analysts provided ���good-faith ratings in [the] unprecedented U.S. housing market in 2007.��� ���A DOJ lawsuit would be entirely without factual or legal merit,��� the ratings agency said. ���It would disregard the central facts that S&P reviewed the same subprime mortgage data as the rest of the market���including U.S. government officials who in 2007 publicly stated that problems in the subprime market appeared to be contained���and that every CDO that DOJ has cited to us also independently received the same rating from another rating agency.��� S&P added that although it regrets its inability to anticipate the deteriorating conditions in the mortgage market at that time, the agency acted quickly in downgrading the securities included in the CDOs. In addition, the company called attention to its efforts to improve its systems, governance, analytics, and methodologies in the years following the crash. ���Clearly, we must all do a better job identifying economic trends that could lead to future crises,��� S&P said. ���For their part, governments have established new institutions to identify risks to financial stability, such as the Financial Stability Oversight Council in the U.S. At S&P, we have taken to heart lessons learned from the financial crisis and made extensive changes that reinforce the integrity, independence, and performance of our ratings, including compliance with today���s enhanced regulatory oversight.��� SERVICERS TRIM SHADOW INVENTORY As servicers rise out of the paralysis caused by ambiguous regulatory issues, they are able to take necessary steps to clear out aging loans in shadow inventory, according to a report from Moody���s Investors Service. Moody���s says the number of loans in foreclosure shadow inventory���or loans in the process of foreclosure but with no resolution��� decreased between the second and third quarters of 2012, with the exception of jumbo loans from Citi and subprime loans from Bank of America. Across all product types, JPMorgan Chase experienced the biggest decrease in foreclosure shadow inventory loans. ���This is a good sign for servicers as it is an indication that they have addressed the operational and staffing hurdles they faced in the past and have begun to reduce the backlog of aged foreclosures and REO properties,��� Moody���s stated. The ratings agency also noted two other factors are driving the improvement in shadow inventory: recent bulk sales and subservicing of seriously delinquent loans to special servicers. Although loans in foreclosure decreased in Q 3 2012, the average number of days loans remained in the foreclosure process increased. At the same time, the number of loans sitting in REO inventory fell, with the exception of certain product types from Citi (jumbo), Chase (Alt-A), and Wells Fargo (subprime). ���We believe that an increase in short sale volumes and an ability to sell houses quicker in the improved housing market resulted in the drop in REO inventory,��� Moody���s stated. STAT INSIGHT Average number of days to complete a foreclosure nationwide during the final quarter of 2012. Source: RealtyTrac