AgentMarkets & Economy

Mortgage industry struggles to manage default risk

Risk-premium reserves too small to cover losses
Published on Mar 3, 2008

Get Inman via Facebook Messenger
Our top headlines delivered once a day.
by CareyBot

An enormous amount of ink has been spilled on the mortgage market crisis, and I have contributed my share. Yet I am now convinced that the most important factor underlying the crisis, which has been in plain view all along, has been overlooked. It is the way in which the mortgage industry manages default risk.

There are, in fact, two systems for managing default risk. In both, the borrower pays a premium scaled to estimates of the risk of the transaction. But, while one system has worked well, the other has been a disaster.

Comments