In a world of new management styles and latest-and-greatest discoveries, there’s one basic tenet that’s remained inarguable. If you don’t know what it is, there’s no way you can effectively manage it. It sounds simple enough, but in our industry, there’s a lot of planning and problem solving in an area that is as broad and cryptic as it is unclear. That area is risk. In fact, in all my recent discussions with mortgage professionals it is the one word that comes up more frequently than any other. Since my job is to get to the heart of the matter, I took the time to delve deeper into each of these discussions. And what I found was that risk means very different things to different people.
If we’re going to tackle our industry’s areas of weakness, we need to be able to define risk. We need a standardized way to classify the various types of risk. If we cannot define it, then we cannot classify it, and we’re dealing with the Boogie Man. There’s no way we’ll be able to address it, contain it, and when needed, mitigate it.
The “R word” is tossed around the business more than any other, often without regard to what it really means. Sometimes I think “risk” is used by some in the mortgage industry to try to command attention. Perhaps there are vendors, consultants and advocates who are so interested in getting someone’s attention that they think by attaching “risk” to whatever it is they are discussing they will garner more clients or more interest?
While clearly the mortgage business is all about risk, we need a better way to structure the various types and forms of risk if we want to be able to effectively manage them. It occurred to me that the mortgage industry might take a cue from scientists and develop “a taxonomy of risk.”
A what, you ask? Isn’t that what I had to learn in biology, and how does that relate to risk management in mortgage lending?
A taxonomy is really just a framework used to classify something by grouping individual ideas into a larger class and then organizing these classes into even larger classifications. A taxonomy includes a description, an identification, terminology, and classification.
So here’s my idea for a taxonomy of risk in the mortgage business: Separate the various forms of risk and group them by category. For example, there would be a grouping for all the issues surrounding consumer risk. Other classifications could include credit risk, interest rate risk, and regulatory risk.
If we were to group the various risk group categories in this way, wouldn’t it be easier to manage them? I think so, but tell me, what do you think?
