RIHA Releases Special Report on Managing Mortgage Product Development Risk
The Mortgage Bankers Association’s Research Institute for Housing America released a new special report, Managing Mortgage Product Development Risk.
The report (https://www.mba.org/news-research-and-resources/research-and-economics/research-institute-for-housing-america), authored by Clifford Rossi, Executive in Resident and Professor with the Robert H. Smith School of Business at the University of Maryland, “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.”
The study noted intrinsic risks associated with mortgage products and processes amplified aggregate losses of mortgage originators, investors and servicers following the mortgage boom of 2004-2007. In many instances product development acceded to market pressures as the economy expanded and regulatory oversight waned.
“Competition and a benign economic environment led to risk layering, where combinations of risky attributes significantly elevated strategic, market, credit, operational, reputational, legal and regulatory risk to firms,” the report said. “As products morphed over time in response to greater risk layering, it masked how these products would perform under stress and the impact of the manufacturing process quality to control risk.”
Rossi said the potential for products to morph over time as features change in response to market conditions can lead to poor pricing, risk and business decisions. The study, he said, provides the real estate finance industry with a framework for addressing both in an integrated manner.
“Leveraging systems engineering and commercial real estate risk rating methodologies, the paper describes scorecards for assessing product risk and process quality,” Rossi said. “Such tools can be customized and provide a means of evaluating mortgage products and for identifying potential gaps in processes and product prior to product release.”
“Now is a particularly important time to pay attention to risk management in mortgage products,” said Lynn Fisher, RIHA Executive Director and MBA Vice President of Research and Economics. “The single-family mortgage market is undergoing significant change these days. As employment continues to improve and new construction eventually comes online, we will see increasing demand for new or re-imagined mortgage products.”
Rossi discusses both the RIHA paper and a new program in development with MBA Education on Advanced Risk Management in this MBANow video: https://www.youtube.com/watch?v=6o9zT8qj_bo&feature=youtu.be.
Additionally, Rossi will discuss this paper and other emerging risk management issues during a panel at the MBA Risk Management, Quality Assurance & Fraud Prevention Forum 2017 in Miami, taking place Sept. 24-26. For more information, click https://www.mba.org/conferences-and-education/event-mini-sites/risk-management-qa-and-fraud-prevention-forum-2017.
The MBA Research Institute for Housing America is a 501(c)(3) trust fund. RIHA’s chief purpose is to encourage and assist–through grants to distinguished scholars and subject matter experts, educational institutions, research facilities and government organizations–establishment of a broader based knowledge of mortgage banking and real estate finance. Additional studies are on the RIHA website, www.housingamerica.org.
