Insights / Chart

Analysis of Mortgage-Backed Securities and the Financial Crisis of 2008

Source: BFI Working Paper No. 2018-24, “Mortgage-Backed Securities and the Financial Crisis of 2008: A Post Mortem,” by Juan Ospina, economist at Banco de la Republica de Colombia, and Harald Uhlig, UChicago professor of economics
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Ex-Ante vs Ex-Post Ideal Ratings
In this figure, the authors compare the original credit rating (Ex-Ante Rating) to the rating that ex-post they would have assigned given the security’s realized loss using Moody’s idealized Expected Loss Table by Rating. The yellow line shows the fraction of securities that was assigned each rating level. The blue line shows the fraction of securities that should have gotten each rating level based on their loss as a fraction of original principal. The calculations are weighted by dollar value of principal.

Ratings agencies were roundly criticized for mis-rating mortgage backed securities and, thus, helping fuel the speculation that led to the Financial Crisis. However, this analysis reveals that these agencies got their ratings about right, based on ex-ante ratings by the agencies and what would be considered ideal ratings (ex-post).