Operational Risk Monitoring and Control

Abstract

The sampling and verification methodology is really just an application of conventional risk-assessment and quality control practices to mortgage lending and the mortgage securitization process. Looking back, a risk assessment that could have limited or even prevented the subprime mortgage crisis would have involved recognizing that bad subprime lending is a potentially catastrophic operational risk and that following the loan-quality inspection steps described in chapter 3 could have educated the market regarding the quality of the mortgages it was originating. Looking forward, a risk assessment that can limit or even prevent future lending crises involves recognizing that bad lending of any sort, performed on a large enough scale, is a potentially catastrophic operational risk.