August 11, 2019

Errors in the risk analysis of granted mortgage loans: Perverse incentives and mechanistic criteria

The Bank has in its balance sheets a high percentage of unpaid mortgage loans and uses it as an explanation of its expensive loan policy and its current Spartan risk criteria.

Let me tell you, as a connoisseur of this sector, that this speech sounds like ” excuses for bad payers .” Now they are very strict in granting mortgages why their current clients do not pay them or pay them badly. Sounds reasonable, right? Not me. If your clients are not good payable, will you have any fault in having selected them as beneficiaries of your credits, right? And their way of reacting is to stigmatize potential mortgage clients with exorbitant requirements and high prices. Better they would have thought before and they wouldn’t have so many problems.

This crisis was more than announced

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At least in terms of the bursting of the real estate price bubble. In 2004 I inherited a piece of land and the fall of this type of assets was already feared (just go to a newspaper archive and check the specialized press of the time).

The Bank decided to ignore these predictions and expose themselves excessively to the promoter sector, granting them almost unlimited liquidity for their constructions and financing the acquisition of their promotions at increasingly higher prices. And now they ask us to fix it together. And what part do they plan to do to fix it?

I am going to focus on the absurd, wrong or too well-intentioned risk policies that have granted the granting of mortgage loans to individuals. Imagine how the risk analyzes should have been to the promoters if that of the individuals has been so lax.

Many financial institutions that have decentralized the powers to grant mortgages, and in many cases this has caused problems.

It will not be me who criticizes the current banking directors

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Once again, at least. When the approval of a loan of these magnitudes is left in the hands of employees with an aggressive commercial profile and variable remuneration linked to volume and not to the quality of customers, what has happened happens. There are no incentives to filter solvent customers. The director of a branch is transferred every few years, so that the default of its current clients, in the background, will be suffered by another partner.

Apart from perverse incentives

Apart from perverse incentives

 

The director’s experience also counts, and much. Can anyone really believe that a newly promoted costumed youngster may be able to assess a person’s future creditworthiness? A resounding no is what I would answer.

To overcome the lack of proficiency in the branch risk assessment and standardize the analyzes, risk analysis software has been created. The director of banking enters the data of the client, of his work, of the house that he wants to finance and little more and the screen says: Approved, denied, under study by a superior or similar department. The ones I know are so basic that it would be better not to trust these scorings so much.

They depend on the data that the human supplies. And we already have a big problem. Whether it seems true or not, there are many bankers who do not know how to correctly interpret an IRPF or a payroll. And they put in the computer the income that they interpret.

written by admin - Posted in Uncategorized

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