The major credit rating agencies, Moody's, Standard & Poors, and Fitch, bear a heavy burden of responsibility for the financial meltdown. It was their seal of approval that enabled Wall Street to develop a multi-trillion-dollar market for bonds resting on a foundation of tricky loans and bubbly housing prices. Institutional investors around the world were seduced into buying these high-risk securities by credit ratings that made them out to be as safe as the most conventional corporate and municipal bonds.
The major credit rating agencies, Moody's, Standard & Poors, and Fitch, bear a heavy burden of responsibility for the financial meltdown. It was their seal of approval that enabled Wall Street to develop a multi-trillion-dollar market for bonds resting on a foundation of tricky loans and bubbly housing prices. Institutional investors around the world were seduced into buying these high-risk securities by credit ratings that made them out to be as safe as the most conventional corporate and municipal bonds.
Ivo Pezzuto - Journal of Governance and Regulation volume 1, issue 3, 2012, c...Dr. Ivo Pezzuto
Journal of Governance and Regulation / Volume 1, Issue 3, 2012, Continued - 1
Pezzuto, I. (2012). Miraculous Financial Engineering or Toxic Finance? The Genesis of The U.S. Subprime Mortgage Crisis and Its Consequences on The Global Financial Markets and Real Economy
CBIZ MHM Special Report: THE EMERGING FRONTIERS OF RISK MANAGEMENT - TODAY’S ...CBIZ, Inc.
How well prepared is your company for the risks, expectations, and stresses on internal controls that lie ahead?
This report will help you understand how your company compares with others and what steps you can take now to improve the way you manage risks.
For more information visit http://www.cbiz.com/ras/
An Analysis of the Limitations of Utilizing the Development Method for Projec...kylemrotek
Abstract: The rise and fall of subprime mortgage securitizations contributed in part to the ensuing credit crisis
and financial crisis of 2008. Some participants in the subprime-mortgage-backed securities market relied at least
in part on analyses grounded in the loss development factor (LDF) method, and many did not conduct their own
credit analyses, relying instead on the work of others such as securities brokers and rating agencies. In some
cases, the parties providing these analyses may have lacked the independence, or at least the appearance of it, that
would have likely better served the market.
A new appreciation for the value of independent analysis is clearly a silver lining and an important lesson to be
taken from the crisis. Actuaries are well positioned to lend assistance to the endeavor.
Mortgages are long-duration assets and, similarly, mortgage credit losses are relatively long-tailed. As casualty
actuaries are aware, the LDF method has inherent limitations associated with immature development. The
authors in this paper will cite examples of parties relying on the LDF or similar methods for projecting subprime
mortgage credit losses, highlight the limitations of relying exclusively on such methods for projecting subprime
mortgage credit performance, and conclude by offering general enhancements for an improved approach that
considers the underwriting characteristics of the underlying loans as well as economic factors.
U.S. Lending Industry Meets Mortgage Process as a ServiceCognizant
In a challenging and changing market, mortgage process as a service, orMPaaS, can provide banks with the talent and systems to handle essen¬tial lending services, enabling them to focus on rebuilding their business through product innovation to capture market share.
1. JANUARY 2008
VOL. 6, NO. 1
FOR THE COMMERCIAL FINANCE PROFESSIONAL | W W W. A B F J O U R N A L . C O M
Title Insurance for Secured Lenders:
A New Twist for a Time-Tested Risk Management Tool
BY THEODORE H. SPRINK
Relaxed standards and a shaky market have shown a need for even more protections for lenders. With that need comes
a tested idea not yet common beyond the real estate market: title insurance. As a way to assist financiers in the here and
now, Ted Sprink poses the argument for why title insurance isn’t just for real estate lenders anymore.
B
efore July 2007, the market was awash in liquidity with people and systems.” From the perspective of risk managers,
far “too much money chasing too few deals.” Perhaps supervisors and shareholders, the consequences of such
we should say too few well-structured deals: Hedge failures are severe. As we will discover, one of the risk
funds and private equity partnerships in competition with or management tools that bridges credit and operational risk
financed by banks, were seeking to deploy vast sums of money for secured Commercial & Industrial (C&I) loans has been
from the constant flow of contributions from pension plans, used by bankers for years within their real estate portfolios.
endowment funds and foreign investors. In the wake of this The Basel Committee on Banking Supervision’s Consultative
competition, relaxed covenant packages and historically low-risk Document on Operational Risk stated: “The primary mecha-
pricing, there has been very little room for error. nism currently used for mitigating operational risk exposure is
Attorney Scott McPhee of the Los Angeles office of Morrison insurance.” Title insurance has been used by risk managers to
Foerster LLP, who represents Countrywide as well as other shift risk in the past, and has become an essential component
leading lenders, notes, “Loan markets have suffered in recent of the real estate secured lending business and mortgage-
THEODORE H. SPRINK years with ‘excess capital,’ which has led to greater competi- backed securitization market.
SVP/National Marketing tion for loan originations and relaxed underwriting standards.” Traditionally, real estate lenders for both commercial and
Director, UCC Risk Mgmt. McPhee refers to such relaxed underwriting standards as having residential transactions, as well as investors, have used title
Division, Fidelity National an impact on credit quality, loan pricing, potential legal fees, insurance to minimize documentation errors and to manage
Financial Family of Companies reliance collateral, default rates and ultimately, recoveries. problems associated with challenges to lien priority. Lenders
It has been noted over the last two year’s of Quarterly Senior have benefited from the related improvement in credit quality,
Loan Surveys that underwriting standards continue to trend secondary market value and liquidity.
downward. Implicit in these findings, loss-given-default expo- As late as the mid-1950s, real estate title insurance had
sures have risen. At a recent Standard & Poors (S&P) sympo- not yet become universally accepted or utilized by lenders.
sium on CLOs and commercial loans, it was suggested that the Lawyers’ legal opinions and abstracts were widely utilized in
recovery rates on the S&P migration tables would need to be the nation’s real estate markets. Standardized real property title
recalibrated to reflect an increased level of risk. policy forms of coverage, endorsed by the American Land Title
S&P further proffered that the next cyclical downturn could Association (ALTA), were still a decade away.
be more severe than recent experience. Bruce Fraser of the Los Many believe it was the secondary market, with the advent of
Angeles office of Sidley & Austin, who represents Wells Fargo Fannie Mae and Freddie Mac that led to not only the importance
Bank as well as other major lenders, states, “The current and of title insurance for individual loan originations, but the invest-
expected unstable future economic conditions will likely result ment community’s need for enhanced, high-quality, real estate
in increased loan defaults, which will cause greater reliance on related “securities.” In short, the advent of mortgage-backed
credit quality and risk management tools.” securities relied on the efficiency and efficacy of title insurance
The exposure to operational risk has also escalated as a fundamental risk management tool.
substantially and has made many institutions more vulner- While title insurance is a cornerstone of the real estate
able to losses from “failed or inadequate internal processes, lending practice, traditional real estate title insurance has
“ conditions will likely resultunstable futureloan defaults,
The current and expected
in increased
economic
which will cause greater reliance on credit quality
and risk management tools. ”
— Bruce Fraser, Sidley & Austin Los Angeles office