New Criterion Study Finds That Risk in the Mortgage Market Is Understated

February 15, 2007

WASHINGTON, D.C. – Risk in the U.S. mortgage market may have been severely understated for years, according to market analysts in a paper presented today at Hudson Institute.

Joseph Mason (Drexel University) and Joshua Rosner (Graham Fisher & Co.) today unveiled new research which raises concerns that mortgage-linked collateralized debt obligations (CDOs) are exposed to significant and unanticipated losses if the U.S. housing market continues to stagnate.

Mason and Rosner find that inadequate transparency, massive structural changes in asset composition, and a credit rating industry ill-equipped to evaluate market risk and operational weaknesses, could result in a broad financial decline, initiated by a weakening housing industry and aggravated by a retracting credit market.

"The danger in these products is that in changing hands so many times, no one knows their true make-up, and thus who is holding the risk," said Rosner. "Revelations by HSBC and others over the past few weeks have finally confirmed that these risks are much more significant than the broader markets had anticipated."

"This study of risk in the subprime mortgage market is very timely," said John C. Weicher, Director of Hudson Institute's Center for Housing and Financial Markets. "The subject has been much in the news just in the last few days, but there is a need for further research."

Download the paper here.