Mortgage Mayhem

  • Douglas Robertson


Financial institutions may use several methodologies to mitigate at least one type of especially pernicious operational risk: bad lending. Marshall includes bad lending in a list of potential catastrophic losses that can threaten the viability of a company.1 Not only did bad lending associated with subprime mortgages drive many lenders out of business, but also linkages through the securitization market threatened the viability of many global financial markets.


Operational Risk Operational Failure Appraisal Error Mortgage Fraud Mortgage Origination 
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  1. 1.
    Marshall’s list of potential catastrophic losses also includes rogue trading, insider fraud, poorly understood derivatives, poorly rolled-out new products, inadequate controls in emerging markets, counterparty failures, natural disasters, and snowballing reputational losses. See Christopher Marshall, Measuring and Managing Operational Risks in Financial Institutions: Tools, Techniques, and other Resources (Singapore: John Wiley & Sons, 2001), p. 75.Google Scholar
  2. 2.
    See Patrick de Fontnouvelle, Virginia Dejesus-Rueff, John S. Jordan, and Eric S. Rosengren, “Capital and Risk: New Evidence on Implications of Large Operational Losses,” Journal of Money, Credit, and Banking 38, no. 7 (2006), 1819–46.CrossRefGoogle Scholar
  3. Roland Gillet, Georges Hübner, and Séverine Plunus, “Operational Risk and Reputation in the Financial Industry,” Journal of Banking & Financ 34, no. 1 (2010), 224–35CrossRefGoogle Scholar
  4. 21.
    The originate-to-sell business model also complicated regulation of subprime lending. Some mortgage originators would tend to abuse the securitization channel to hide shoddy originations. Michael Lewis’s book, The Big Short: Inside the Doomsday Machine (New York: W.W. Norton, 2010)Google Scholar
  5. Clara Cardone-Riportella, Reyes Samaniego-Medina, and Antonio Trujillo-Ponce, “What Drives Bank Securitisation? The Spanish Experience,” Journal of Banking & Finance 34, no. 11 (2010), 2639–51CrossRefGoogle Scholar
  6. 24.
    See Arthur J. Wilburn, Practical Statistical Sampling for Auditors (New York: Marcel Dekker, 1984).Google Scholar
  7. 26.
    See Min Qi and Xiaolong Yang, “Loss Given Default of High Loan-to-Value Residential Mortgages,” Journal of Banking & Finance 33, no. 5 (2009), 788–99CrossRefGoogle Scholar
  8. 35.
    A study by Anno Stolper, “Regulation of Credit Rating Agencies,” Journal of Banking & Finance 33, no. 7 (2009), 1266–73CrossRefGoogle Scholar

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© Douglas Robertson 2016

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  • Douglas Robertson

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