On January 21, 2015, the US Securities and Exchange Commission brought charges for the very first time against a major rating agency, sanctioning Standard & Poor’s Rating Services (S&P) for making misrepresentations and failing to maintain accurate records and controls concerning its rating of certain commercial and residential mortgage- backed securities (CMBS and RMBS). Those sanctions include a one-year ban from rating any new issue US conduit/fusion CMBS transactions and $77 million in payments to the SEC and to the New York State and Massachusetts attorneys general.
S&P’s Rating of Conduit/Fusion CMBS
Beginning in 2009, S&P issued new criteria for rating conduit/fusion CMBS transactions (i.e., CMBS transactions involving a pool of multiple loans that are diversified by both property type and geography). Specifically, S&P used the debt service coverage ratio (DSCR) — a property’s annual net operating income divided by the annual mortgage debt service — to estimate whether the underlying mortgage loans would default during their term. S&P then used that estimate to determine the amount of credit enhancement it would require to achieve each rating level.
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