Chief Risk Officers Talk…Risk

 
MIAMI–Chief risk officers here at the Mortgage Bankers Association’s Risk Management, QA and Fraud Prevention Forum shared what keeps them up at night.

“One thing we can agree to, in the decade since the financial crisis, is an evolution in the way in which we manage risk,” said Clifford Rossi, professor with the Robert H. Smith School of Business at the University of Maryland, and author of a recent paper through the MBA Research Institute for Housing America, Managing Mortgage Product Development Risk. “It’s been 10 years and a lot of institutional memory has been erased.”

The report (https://www.mba.org/news-research-and-resources/research-and-economics/research-institute-for-housing-america) “recommends a more formalized approach” to assessing mortgage product risk that takes into account both product and process risk.

“Mortgage banking is a highly cyclical business, prone to expansion and contraction as market conditions change,” Rossi said. “Mortgage product innovation is healthy for the industry and consumer so long as product risks and process quality are well understood.”

“In today’s marketplace, we’re above equilibrium,” said John Stewart, senior vice president and chief risk officer with BECU-Boeing Employees’ Credit Union, Seattle. “What I wonder about is what’s going to bring us back. We’re nine years into an economic expansion, and something is going to change. There are signs of frothiness out there, but it’s hard to point out what’s going to tip the market.”

Stewart also noted the end of the Federal Reserve’s quantitative easing program should have short-term ramifications for the market. “We’re going to come back to an environment where deposits are competitive and scarce,” he said.

Mihir Patel, executive vice president and chief risk officer with Mr. Cooper (formerly Nationstar), Dallas, said cyber-security is at the top of his list. “The ability to stay relevant and keep up with the threats are happening is critical to me–we need not boil the ocean while still managing our risk profile in a prudent manner,” he said. “We’re looking to put stronger controls in place while also enhancing our ability to react when an incident occurs.”

Patel said as a risk officer, caution is a byproduct. “We don’t want to blindly jump into the new marketplace without having a plan and an understanding of the pitfalls that might arise.”

On one hand, Patel added, he said he would be open if regulators were to ease up. “But at the same time, the regulations have created a barrier of entry for organizations that do not take risk management seroiusly,” he said. “I’m interested to observe how this will play out.”

Derek Brummer, executive vice president and chief risk officer with Radian Group Inc., Philadelphia, said increasing interest rathe regtes, combined with a “supernova of liquidity,” have created some frothiness that is concerning from a macro perspective. “How does the market respond to that and how does the mortgage industry respond to that?” he said. “We have a lot of players in the industry right now who have never been in a market like this.”

On an absolute basis, Brummer said, credit is sound and tight. “But we need to know who is pushing the buttons,” he said.

As a mortgage insurance company, Brummer said Radian is also focused on the regulatory environment. “Everyone is talking about GSE reform, but all reform has to be done together,” he said. “Housing finance reform and overall housing market stability is critical to us.”

Stewart noted BECU performs risk testing every year. “Stress testing is a big part of our toolkit, but playing it through is just as important,” he said. “We look at how we might need to change our management practices.”

Patel said engagement from the leadership team is important in working through potential risk scenarios. “Anything we identify as a potential risk we monitor them and embed the critical risks in our tracking processes,” he said.

“What you don’t want to see is layered risk,” Brummer said. “We look at market frothiness and try to determine what is happening; is there a prevalence of gifting? We also tend to stay away from markets, such as the Bay Area, where there is a lot of frothiness.”

Risk culture is Radian’s top priority every year, Brummer said. “Ultimately, what matters is risk culture. We’re in a credit-focused business is to make sure we have proper data and analytics…we’re dealing with probabilities–what is happening in X scenario, so we have to have buy in from both management and the board. A good risk culture has to translate into something tangible.”

“Culture as an organization is critical,” Patel said. “We recently changed our name from ‘Nationstar’ to ‘Mr. Cooper.’ This was more than a simple brand change–this was our organization changing how we think and operate. We are a people company that essentially strives to do what is best for our customers–that is a risk culture.”

“Having a board that has been through a cycle, that knows that things are going to change, is important us,” Stewart said.

How do we make sure risk tools stay ahead of changing market conditions? Patel said Mr. Cooper has an embedded risk management process in place, in which new product proposals go through a thorough vetting.

Stewart said in an unstable regulatory environment, BECU is formalizing its relations with Washington. “We’re advocating for a more stable regulatory foundation,” he said. “After many years of CFPB exams, the Bureau’s tone is much more collaborative than it was five years ago.”

“We’ve monetized our core competency, which is managing risk,” Brummer said. “We don’t have a lot of control over the regulatory agencies, so we have to be nimble and agile so we can adjust accordingly.”