OUR APPROACH
crossi@criskadvisors.com
Risk is ever-present regardless of the industry. As conditions to your business and markets change, having the right risk governance, controls and analytics to successfully steer away from extranormal risk is an essential ingredient to effective risk management. At Chesapeake Risk Advisors, LLC we focus on maintaining a balance between risk and return providing clients with a range of strategic and analytical risk solutions to address various risk management problems. Based on decades of direct senior executive experience at Fortune 500 companies, Chesapeake Risk Advisors, LLC is a risk management advisory practice with a long track record in elevating risk management practices across financial services, pharma, insurance and other sectors.
UNPARALLELED RISK MANAGEMENT EXPERTISE
Spanning a 25-year industry career, Dr. Rossi has worked at the highest levels of risk management at major corporations and had extensive experience in managing risk at companies under all business conditions and is an expert in managing risk in times of crisis. His technical and risk leadership skills provide a well-rounded experience that are unique to risk management. Following his industry career, Cliff entered academia as Professor-of-the-Practice in the Finance Department at the Robert H. Smith School of Business, University of Maryland as well as Director of the Smith Enterprise Risk Consortium and an Executive-in-Residence. He is a sought after speaker at conferences and industry events and authored the practitioner and graduate textbook, A Risk Professional’s Survival Guide – Applied Best Practices in Risk Management. He received his MS and PhD degrees from Cornell University.
OUR CLIENTS
Chesapeake Risk Advisors, LLC has been engaged by a wide variety of clients including some of the largest commercial banks, federal regulatory agencies, pharma companies, mortgage insurance companies, community banks, credit unions, Federal Home Loan Banks, asset management companies and private equity firms, among others.
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Example engagements include advising on development of ERM frameworks and risk appetite statements, advising boards on risk management practices and governance issues, expert witness testimony, validating complex statistical models used for loan loss reserving and loss forecasting, evaluation and recommendation of portfolio management tools and development of statistically-based credit underwriting, valuation and interest rate risk models
New Lender Choice Adverse Selection Analysis
Looming Risk for Mortgage Credit and MBS Investors from Lender Choice is the latest analysis conducted by Dr. Clifford Rossi. The FHFA’s announcement allowing lenders to select between Classic FICO® and Vantage Score 4.0 in determining which credit score to send to Fannie Mae or Freddie Mac in their automated underwriting systems (AUS) has profound implications for credit risk to the GSEs as well as MBS and credit risk transfer security (CRT) investors and mortgage insurers. Giving lenders the option to choose between two credit scores to deliver to the GSEs for underwriting opens the door to a form of adverse selection that will lead to higher credit risk for Fannie and Freddie and will negatively impact borrowers. Consumers already facing significant housing affordability headwinds will be further burdened by higher MI premiums and mortgage rates because of the “lender choice” policy.
For decades both GSEs maintained minimum credit score requirements for their AUS as an important and effective credit screening mechanism to guard against potential errors the underlying credit scoring models might make on borrowers with credit scores below 620 that were not well represented in the historical data on which those models were built. Removing the minimum credit score requirements amplifies the potential for adverse selection to the GSEs under the “lender choice” policy. This white paper quantifies how lender adverse selection would affect GSE credit risk exposure under several scenarios of the “lender choice” policy. Specifically, it shows that the GSEs would potentially face significant credit losses under a scenario where all lenders engage in adverse selection.
It is impossible to predict the degree to which adverse selection will manifest, however, any adverse selection will lead to higher credit losses for the GSEs, more uncertainty for MBS and CRT investors and ultimately higher costs for consumers. Therefore, the FHFA should immediately suspend “lender choice” until a comprehensive vetting of potential adverse selection to credit and MBS investors and consumers has been conducted.