We study the effects of rating shopping on the market for MBS. Outside of AAA, realized losses were much higher on single-rated tranches than on those with multiple ratings, and yields predict future losses for single-rated tranches but not for multi-rated ones. These results suggest that single rated
tranches have been ‘shopped,’ whereby pessimistic ratings never reach the market. In the AAA market, by contrast, most tranches receive two or three ratings and those ratings almost always agree. The convergence in ratings suggests that rating agencies may have ‘catered’ to investors, who could not purchase a tranche unless it has multiple AAA ratings.