Investors skeptical of rating firms' grades are cheering the Federal Reserve's recent move to expand the list of acceptable firms for one of its lending programs.

The move is seen as a step toward introducing more competition among the firms and allowing investors a better view on the performance of existing commercial mortgage-backed securities.

The New York Fed said last week it would accept ratings on these bonds from five, instead of three, rating agencies for its Term Asset-Backed Securities Loan Facility, or TALF. To be eligible for funding under the program, the bonds need to have top-notch triple-A grades from two agencies and should not be on watch for a potential downgrade by any of the others. Investors can get loans at attractive rates from the Fed to buy these securities.

The expanded list includes a subscription-based agency, Realpoint LLC, and Canada's DBRS Inc., in addition to Moody's Investors Service, Fitch Ratings and Standard & Poor's, a unit of McGraw-Hill Cos. (MHP).

"The Big Three have lost a lot of credibility," said Derrick Wulf, a senior portfolio manager at Dwight Asset Management in Burlington, Vt., noting the swiftness with which they downgraded bonds that they had awarded high marks to just a few months before.

On Tuesday, S&P issued a report requesting comment on proposed changes to its CMBS rating methodology and said these changes could result in significant downgrades to the 2005 to 2007 vintage top-rated so-called "super-dupers," making them ineligible for TALF.

Such downgrades inevitably lead to a loss in investor confidence in ratings. This is why to renew faith in the grades attached to these complicated bonds it is helpful to have evaluations from multiple rating agencies.

"It's always good to get a different opinion because investors are angry and believe the old bad habits are still in existence," said Jim Harrington, an asset-backed securities trader at Ryan Labs Asset Management in New York.

Some ratings firms, including the three leading agencies, are paid by the debt issuers, raising the question of conflict of interest. Efforts are underway to tighten regulation of the raters, whose rankings can determine whether an investor can buy the bonds in question.

Including more agencies not only creates competition among the ratings agencies and improves the ratings process itself, it also helps dispel the perception of ratings shopping, where issuers avoid agencies they believe may be harsher on their bonds than others.

"Investors would be able to see evidence of ratings shopping if one agency was consistently lax, and then they would demand higher-risk premiums," Wulf said.

Deals with ratings from the most credible agencies would generate the most interest, he noted.

For their part, the Big Three agencies say they welcome the Fed's move and appreciate being included in the list of agencies whose ratings determine the criteria for TALF eligibility.

"S&P supports competition in the marketplace because we believe investors are best served by multiple opinions on credit risk," said Adam Tempkin, a spokesman for S&P.

While the increase in the number of acceptable ratings agencies is a positive, investors still have to conduct their own due diligence before they purchase a bond.

That said, "having five agencies say a bond is triple-A carries a lot of weight," Harrington said.

-By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371; anusha.shrivastava@dowjones.com