Creditor protection and credit ratings in the US RMBS market

Abstract

More than a dozen years after the Dodd-Frank Act was introduced, we investigate whether credit ratings for the US residential mortgage-backed securities (RMBS) market differ given the different levels of creditor protection across the US states. Our paper provides three results. First, for the period 2017–2020, we provide evidence that there is inconsistency between credit rating agencies (CRAs): only for Dominion Bond Rating Service Morningstar (DBRS) and Moody's, we observe that the credit ratings for securitization tranches differ given different creditor protection levels across states. Second, in states with higher creditor protection, the relatively new CRAs, DBRS and Kroll Bond Rating Agency (KBRA), are more likely to provide more optimistic ratings than CRAs historically present in the rating market (Moody's, S&P, and Fitch). Third, issuers appear to issue larger deals in US states that are more creditor friendly.