MBA Report Blames Risk Management Issues For The Economic Crisis

aused the collapse of the U.S. housing and mortgage banking markets? According to the Mortgage Bankers Association (MBA), the absence of risk management brought about a toxic cocktail of poor data, incomplete performance metrics, short-term focus and unrealistic optimism among senior business managers. The newly released ‘Anatomy of Risk Management Practices in the Mortgage Industry,’ conducted by Prof. Cliff Rossi of the University of Maryland and sponsored by the MBA's Research Institute for Housing America (RIHA), highlights disastrous risk management processes that were prevalent throughout the industry in the period leading up the economic crisis. The report determined that between 1999 and 2006, combined loan-to-values increased as the percentage of loans with silent second liens attached to the property also increased. At the same time, the percentage of loans with full documentation declined. The resulting increase in risk layering created a gap in understanding the long-term risk profile of these new product combinations and greatly altered the standard products. Furthermore, the report blamed poor planning on the part of the largest mortgage lenders through a relative lack of geographic and product diversification. A false sense of security with new products originated prior to 2007 and a de-emphasis on risk management poured more fuel on the fire. ‘As home prices increased, lenders were pressured to offer innovative products that could help borrowers afford a home," said Rossi in a statement issued by the MBA. "The resulting increase and expansion of risk layering and change in borrower behavior left risk managers unable to offer reliable risk estimates.’ A copy of the report can be obtained through the RIHA [link=]website[/link]. SOURCE: Mortgage Bankers Associ


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