Cliff Rossi, Ph.D., is a “triple threat” in the world of risk management: an academic leader with insights borne of real world experience as both a senior executive at top financial institutions and a federal-banking regulator. He is currently Executive-in-Residence and Tyser Teaching Fellow at the Robert H. Smith School of Business, University of Maryland. His most recent prior position was Managing Director and Chief Risk Officer for Citigroup’s Consumer Lending Group, where he managed the risk of a $300+B global portfolio and led a team of 700. He also served as Chief Credit Officer at Washington Mutual (WaMu); Managing Director and Chief Risk Officer at Countrywide Bank; and held senior risk management positions at Freddie Mac and Fannie Mae. Dr. Rossi began his career at the U.S. Treasury’s Office of Domestic Finance and, later, the Office of Thrift Supervision, where he worked on key policy issues affecting depositories.
Many readers will recognize Dr. Rossi as the author of the American Banker “Risk Doctor” column. The Score caught up with him in the midst of a busy travel season, to touch base on a variety of recent developments.
1. You recently raised concerns about the Corker-Warner GSE Reform bill in an article for American Banker. What are your major concerns?
My biggest issue with the proposed bill is that it assigns an explicit private/public threshold for risk sharing without first doing its homework to determine what level would be appropriate. In addition, it does not address housing finance reform in a holistic fashion, as it is silent on what to do with FHA in the bill. The other issue I have with the bill is that it transfers FHFA personnel over to the new corporation. I believe that there is a misalignment between the skills of FHFA staff and the pricing, underwriting, securitization and insurance portfolio duties of the new corporation.
2. Are your students interested in pursuing careers in the regulatory agencies?
In the wake of the financial crisis, many students have resigned themselves to the fact that getting their dream job at a financial institution is less likely than it was before the crash. As a result, they have become interested in what a career as a regulator looks like and what skills are sought by these agencies. Fundamentally, those students equipped with applied financial and analytical skills are best positioned for recruiting success.
3. What types of borrowers are likely to be most impacted by the 43% debt-to-income ratio standard in determining which loans are considered qualified mortgages (QM)?
Certainly there are borrower segments such as first-time homebuyers in high cost areas of the country that will be hard pressed to obtain mortgage financing at a reasonable price due to QM. Imagine a creditworthy borrower with sufficient down payment looking to buy a home in Oakland, California and has a 44% DTI. That borrower will have to look at fringe markets ready to make that loan and as a result pay a higher rate than a similarly situated borrower in a lower cost area.
4. How can lenders be incentivized to offer loans to those who previously were foreclosed upon or pursued short sales?
I believe incentives work both ways. The lender should first look at the borrower’s circumstances leading to the risk event and subsequent capacity, willingness and ability to repay their obligation and then look at possible structures that align both the borrower and lender’s interests. I’m a fan of shared appreciation mortgages that can allow the lender and borrower to share in the upside of property appreciation.
5. How can lenders guard against repurchase risk when transacting with the GSEs?
Before the crisis, lenders did not generally do a good job at understanding the quality of their loan manufacturing process. As a result, they vastly underestimated GSE repurchase risk as well as recessions of mortgage insurance policies by private MI [mortgage insurance] companies. Lenders must develop tools to allow them to systematically assess their processes and controls. In one of my last CRO roles, we developed a scorecard to assess the quality of risk infrastructure across the organization including all phases of the loan acquisition, sale and servicing process. Such capabilities can help companies understand important shifts in the manufacturing process and take corrective actions.