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Daily Real Estate News  |  May 27, 2010  |   Bankers Ignored Risks When Housing Boomed
Banks took more risks than they should have during the housing boom because they relied on faulty risk models and were too eager for profits to adequately evaluate lending decisions, concluded a recent study authored by University of Maryland Professor of Finance Clifford Rossi.

Rossi found that mortgage lenders were overly eager for high profits and ignored warnings from risk managers. Plus, as lending standards declined, the historical data used to predict defaults was based on conditions that no longer existed.

Teresa Bryce, president of Radian Guaranty Inc., a mortgage insurer, says the industry “lost the art of underwriting” during the boom. “It became a checklist mentality,” she says, and adds that underwriters were “not actually looking at those documents … or making sure what’s in those files makes sense.”

Source: The Wall Street Journal, James R. Hagerty and Nick Timiraos (05/26/2010)

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