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Anatomy of Risk Management
Practices in the Mortgage
Industry: Lessons for the Future
Clifford V. Rossi
Anatomy of Risk Management
Practices in the Mortgage Industry:
Lessons for the Future
Clifford V. Rossi
Robert H. Smith School of Business
University of Maryland
May 2010
2
9946
Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future
© Research Institute for Housing America May 2010. All rights reserved.
Research Institute for Housing America
Board of Trustees
Chair
Teresa Bryce, Esq.
Radian Group Inc.
Michael W. Young
Cenlar FSB
Nancee Mueller
Wells Fargo
Edward L. Hurley
Avanath Capital Partners LLC
Steve Graves
Principal Real Estate Investors
Dena Yocom
IMortgage
Staff
Jay Brinkmann, Ph.D.
Senior Vice President, Research and Business Development
Chief Economist
Mortgage Bankers Association
Michael Fratantoni, Ph.D.
Vice President, Research and Economics
Mortgage Bankers Association
Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future
© Research Institute for Housing America May 2010. All rights reserved.
3
Table of Contents
Executive Summary
7
1. Introduction: Findings and Recommendations
9
2. A Model for Mortgage Risk Taking: Growth, P / E and the Fallacy of ROE
19
3. Data and Model Limitations
27
Data Integrity
29
Economic Environment
31
Mortgage Products and Risk Layering
32
Borrower and Counterparty Behavior
38
4. Governance, Corporate Culture and Risk Taking: A Behavioral Economics Approach
43
5. Lessons Learned
53
6. References
57
Anatomy of Risk Management Practices in the Mortgage Industry: Lessons for the Future
© Research Institute for Housing America May 2010. All rights reserved.
5
Executive Summary
Not since the Great Depression has there been a contraction in...