Senator pushes for ratings agency review

Senator Dodd of Connecticut urges examination of ratings agencies' high assessment of mortgage-related assets.

WASHINGTON (Reuters) -- U.S. Senate Banking Committee Chairman Christopher Dodd on Friday called for an examination of the credit rating agencies' role in valuing the subprime mortgage securities market.

Dodd, a Connecticut Democrat and presidential candidate, also urged federal regulators to raise the investment portfolio cap by 5 percent for mortgage finance companies Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500).

During a conference call with reporters, Dodd expressed "great concern" about how credit rating agencies assessed and rated packages of mortgage-related assets, which include collateralized debt obligations.

"Clearly there was other information that should have warranted something else," he said. "We need to have a thorough examination of that."

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His remarks to reporters came one day after a European Commission official announced a review of the code used by the raters in a probe that could be critical of the industry.

EU Internal Market Commissioner Charlie McCreevy said the crisis in the subprime mortgage sector has highlighted apparent failings in the voluntary code now used by the raters.

The three largest U.S. raters are Moody's Corp.; Standard & Poor's, a unit of McGraw Hill Cos. Inc.; and Fitch, a unit of France's Fimalac SA.

Moody's (Charts) shares closed 78 cents higher at $49.98 and shares of McGraw-Hill (Charts, Fortune 500) finished up 29 cents at $49.14 on the New York Stock Exchange on Friday.

Barney Frank, chairman of the House of Representatives Financial Services Committee, has said he would hold a hearing this autumn to examine how credit ratings agencies contributed to a collapse of the subprime mortgage market.

In May, the U.S. Securities and Exchange Commission adopted new rules to foster competition in an industry dominated by three companies. The rules also cover record-keeping requirements and financial reporting standards.

Cliff Hyatt, a former SEC enforcement attorney now with law firm Pillsbury Winthrop Shaw Pittman, said credit rating agencies are historically difficult to examine. But, he said, that would not stop Congress from asking rating agencies tough questions about how they operate.

Dodd and other congressional Democrats have called on the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie and Freddie, to temporarily lift the portfolio cap so the government-sponsored companies can buy more mortgages.

Frank said Friday the Senate should raise the limit on the size of loans that can be bought by Fannie and Freddie past its current level of $417,000 when lawmakers take up reform legislation.

"It now is clear we underestimated in the House bill how far we should raise the conforming loan limit, and the current crises in the mortgage market demonstrate we should raise it to a higher level," the Massachusetts Democrat said in a statement.

Fannie and Freddie are the nation's two largest sources of mortgage financing and have a combined $1.4 trillion investment portfolio of mortgages.

Fannie asked to lift the cap to allow for additional 10 percent investments to its portfolio, but OFHEO denied that request for the moment.

A higher cap is also opposed by the Treasury Department, the Federal Reserve, and President George W. Bush, who say their holdings are dangerously bloated.

Sen. Charles Schumer, a New York Democrat, said this week that he plans to introduce legislation to temporarily lift the cap between 5 percent and 10 percent if OFHEO fails to do so.

Dodd said the move was urgently needed in financial markets and could not wait for Congress to pass legislation.

"There's enough authority with existing law today ... to allow this portfolio cap to go up 5 percent," Dodd said. "The idea that we have to wait and do the reforms first before they can respond to this is not a legitimate answer to the question."