CSI: Mortgage banking
Mistakes were made in the run-up that ended with the housing market falling off a cliff -- that we know. Many mistakes by many people.
The Mortgage Bankers Association, aware that the finger of blame is often pointed toward its industry, commissioned Cliff Rossi with the University of Maryland to lay out the key lending problems in hopes that they don't get repeated down the road.
Rossi, managing director of UM's Center on Financial Policy and Corporate Governance, was once chief credit officer at Washington Mutual and chief risk officer at Countrywide Bank -- which both crashed headlong into the foreclosure crisis -- so he can speak from experience. Before that, he worked for Freddie Mac, Fannie Mae, the Treasury Department and the Office of Thrift Supervision.
He argues in the new report that the trend toward selling off the loans you originated, happily divesting yourself of any cares about the results, was not by itself to blame for "fueling excessive risk taking."
"The fact that many large mortgage portfolio lenders expanded their held-for-investment portfolios and retained large positions in senior tranches of mortgage securities before the crisis, and afterward experienced heavy credit losses suggests that other forces were at work beyond the originate-to-distribute model," he writes in the study.
Those forces, in his opinion, include the tempting "higher margin potential" of exotic products such as option ARMs and home equity lines of credit, the false sense of security created by booming home prices and the impossibility of judging risk correctly when you have no idea how much money the borrower you just gave $400,000 to is actually making. (See "Loans, no doc.")
"The development of new products and the expansion of risk parameters on existing products came at perhaps the worst time," Rossi writes. "With virtually no historical experience with these new risk combinations and that which existed largely coming from a benign economic environment,
risk models would have little hope to accurately reflect expected loss, let alone loss levels during an extreme event such as the financial crisis."
So what's the solution? Among other things, "it will be essential for the industry to develop early warning measures of the level of risk in new originations and less reliance on imprecise historical performance of new loan products," he says.
How does this match up with your sense of mortgage mistakes and needed corrections?