Fannie Mae and Freddie Mac have tightened their representation and warranty framework. Other public sector mortgage funders, including FHA, VA, and the USDA should follow suit or risk being left with lemons.
Higher capital requirements for federal mortgage lenders, more stringent QM and QRM requirements for borrowers and a heightened reliance on private markets will help keep taxpayers from paying for future bailouts.
Moving to an expected-loss framework would be a step in the right direction but entails a great deal of subjectivity, model risk and confusion for investors trying to compare institutions.
Incorporating both regulatory capital and economic capital into a unified decision measure allows organizations to better optimize risk/return profiles, facilitate strategic planning and limit setting and define risk appetite.
Banks have made an effort to address the many deficiencies in risk management that surfaced during the crisis, but their execution has been lackluster. They should have accomplished more in five years.
Inconsistent calculations and disclosures usually make it impossible for investors to distinguish differences in credit risk from differences in measurement practices when comparing banks.
While the Federal Reserves exclusion of trust-preferred stock from Tier 1 capital is understandable, an analysis shows cumulative preferred stock can absorb losses at times of distress.
Reverse stress tests, effective board oversight and incentive programs that encourage caution curb the tendency to accept excessive risk in the pursuit of business objectives.
