In the wake of the meltdown in the sub-prime mortgage market, increased scrutiny has been focused on both the mortgage-backed securities that many blame for fueling the crisis and the rating agencies that evaluated and graded them before they were sold to investors. Although likely unknown to the general public until the housing market tumbled, mortgage-backed securities have joined other previously obscure financial instruments, like credit default swaps and collateralized debt obligations, at the forefront of the public debate over the current situation. At the same time, the rating agencies that were required to evaluate these securities to ensure that they were “investment grade” have increasingly found themselves in the crosshairs of regulators and disgruntled investors. While rating agencies have traditionally enjoyed broad First Amendment protection from liability for the ratings they provide, these protections are now being challenged. This article examines the role of the rating agencies in the market, the immunity they have traditionally enjoyed and the recent events that may move the agencies towards greater exposure to litigation and regulation.

As the name suggests, mortgage-backed securities are large groups of mortgages that are pooled together to create securities, similar to bonds, that can be sold to investors. Although they come in many different forms — from simple “pass-through” certificates to more complicated collateralized-mortgage obligations — the overwhelming majority of mortgages issued by banks and lenders in the United States are eventually packaged into some type of mortgage-backed security.

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