How to succeed at loan modification and other lessons learned from the mortgage crisis

The great mortgage credit expansion of the mid-2000s and subsequent bust in housing and mortgage markets has prompted a good deal of soul-searching as to what may have gone wrong with the risk analytics and risk management at large financial firms.  What were the risk analytic failures in the mortgage market and what needs to be done to avoid similar failures in the future?  What have we learned about projecting mortgage losses during periods of severe stress economic stress?  How do we better incorporate changes in the structural design of mortgages into our risk models?  Have changes in regulation been effective in reducing mortgage risk?  What have we learned from recent experience with mortgage loan modifications? 

Banking regulators and academic researchers have begun to draw upon lessons learned from the mortgage crisis of the last decade and have been taking positive steps to mitigate risks in mortgage and consumer lending.  Regulators responded by implementing new mortgage rules that require lenders to ensure that borrowers have the ability to pay their mortgage debt obligations.  Regulators have also demanded much more extensive information from financial firms and have increased the quantity of high-skilled personnel devoted to risk analysis.  Academic researchers have examined weaknesses in modeling approaches with a particular emphasis on incorporating changes in the macroeconomic environment and changes in mortgage structural features into mortgage risk models.

This presentation surveys the key lessons learned and ongoing efforts to implement constructive change to improve mortgage risk models.  In particular, the presentation discusses approaches to modeling the impact of loan modifications and other loss mitigation efforts.  In addition, the presentation assesses the effectiveness of innovations in mortgage design, stronger consumer financial protection regulation; and improved risk quantification tools.  Finally, the presentation will discuss key areas for future improvements.