Standard & Poor's Ratings Services is staring at fraud
charges related to its ratings to six commercial mortgage backed
securities (CMBS) in 2011. The Securities and Exchange Commission's
enforcement division has sent a Wells notice to the parent company
McGraw Hill Financial Inc. (MHFI), which however is not a guarantee
that the SEC will bring up the charges. S&P is optimistic
because it has "the opportunity to provide its perspective and to
address the issues raised by the SEC before any decision is made".
Bloomberg notes that "S&P rated six commercial-mortgage bond
deals in 2011, according to a report from Morgan Stanley. They
included three that pooled loans from borrowers across the U.S. and
three tied to a single borrower, such as a $1 billion transaction
linked to retail properties acquired by Blackstone Group LP".
The enforcement action for alleged securities fraud comes on the
heels of S&P facing a $5 billion fraud lawsuit. The lawsuit
filed by the Justice Department related to inaccurate mortgage-bond
Charges Against S&P
The charges are against the CMBS rankings and "public disclosure
made by S&P regarding those ratings thereafter".
According to Bloomberg, "S&P pulled assigned grades three years
ago on the offering from Goldman Sachs Group Inc. (GS) and
Citigroup Inc. (C), prompting the banks to abandon the deal after
it was placed with investors. S&P yanked the rankings after
discovering potential discrepancies in how its methodology was
being applied, the company said at the time. The credit grader then
halted rating any new commercial-mortgage bonds, saying it had to
review a potential problem in its model. That August, the company
said the conflict had turned out not to be significant and it would
resume grading deals".
Following the trouble, S&P had stayed away from the
commercial-mortgage backed securities market. However in 2012,
S&P revised its criteria. The rating agency reshuffled senior
management and changed the commercial real-estate deals' ratings
If S&P is found guilty now, it may be subjected to actions such
as civil monetary penalties or even a cease-and-desist order.
Separately, the U.S. Department of Justice filed lawsuit in Feb
2013 alleging S&P of inflating grades on commercial mortgage
bonds in order to win business.
Safe Mortgage Funds to Buy
The fresh charges against S&P related to its ratings to six
commercial mortgage backed securities may deter investor mood. The
whole episode could have a large detrimental effect on investments
in mortgage bond funds. However, we will pick 3 top rated mortgage
funds that are safe investments. These mortgage funds carry a
Zacks Mutual Fund Rank #1 (Strong Buy)
as we expect the funds to outperform its peers in the future.
Remember, the goal of the Zacks Mutual Fund Rank is to guide
investors to identify potential winners and losers. Unlike most of
the fund-rating systems, the Zacks Mutual Fund Rank is not just
focused on past performance, but the likely future success of the
The funds have healthy year-to-date returns and also have proven
history of decent returns over the last five years.
Loomis Sayles Securitized Asset Fund
(LSSAX) seeks high current income along with preservation of
capital. The fund invests most of its assets in mortgage-backed and
other asset-backed securities. The fund invests in commercial
asset-backed securities. It may also invest in loans from
automobiles, credit cards, home equity loans, manufactured housing,
and other asset-backed securities.
The fund has returned 4.4% year to date and has a five-year
annualized return of 7.8%.
BlackRock Allocation Target Shares Series C
(BRACX) seeks to boost return along with efficient investment
management and income generation. The fund invests in securities
including commercial and residential mortgage-backed securities,
asset-backed securities, corporate bonds, notes and debentures
among others. The securities may also include obligations from
foreign governments and organizations like the World Bank.
The fund has returned 6.6% year to date and has a five-year
annualized return of 7.9%.
Voya Intermediate Bond Portfolio Class I
(IPIIX) invests a lion's share of its assets in bonds that includes
mortgage, corporate and government bonds. These bonds are
investment grade at the time of investment. The fund may invest in
high-yield debts, but will retain an average portfolio with a
minimum of investment grade.
The fund has returned 4.9% year to date and has a five-year
annualized return of 7.5%.
To view the Zacks Rank and past performance of all mortgage
funds, investors can
click here to see the complete list of funds
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find
funds that not only outpaced the market in the past but are also
expected to outperform going forward. Learn more about the Zacks
Mutual Fund Rank in our
Mutual Fund Center
View All Zacks #1 Ranked Mutual Funds
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