Ask anyone in the mortgage lending business today—the industry is all about managing risk.
There are specific standards and regulations to manage all of the risks associated with borrowers and the properties being mortgaged. We have credit guidelines, policies, procedures and automated programs to evaluate borrower and property risk. Think of credit scores, debt-to-income ratios, loan-to-value ratios, and appraisal guidelines.We constantly worry about interest rate risk, default risk and prepayment risk.
Why then, has the mortgage business been the culprit for one of the worst risk failures in our country’s history? Where did the system break down?
In my opinion, the answer is quite simple. The mortgage business was never made accountable. The lenders and servicers charged with managing risk were in no way held responsible for ensuring that all of the guidelines, regulations and policies were actually followed.
The official name for this type of risk is operational risk. As defined under Basel II, operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.
Whether we want to admit it or not, the global financial crisis we are dealing with today is a consequence of the industry’s failure to ensure that loan officers, underwriters, servicers and the myriad other individuals in the business did what they were supposed to do. Nobody felt accountable.
This leads to some important questions: are the industry’s problems due to the fact that quality control and risk management requirements were so poorly developed and defined? Or, is this just another example of how lenders disregarded the impact of their own internal and operational risk, and focused only on the risk borrowers had on their profitability? And, if as I believe, it is both, what must we do to enforce this accountability?
