Edward Golding, US Dept. of Housing & Urban Development

Lessons from the Great Recession: Confessions of a Mortgage Modeler
Dec 9, 2015, 4:30 pm5:30 pm
101 - Sherrerd Hall
Event Description

In the lead-up to the Great Recession, the mortgage industry put its faith in technology rather than the common sense and expertise of those that designed it. Mortgage models were behind many of the bad decisions made by financial institutions, which compounded the effects of the crisis. Models were used industry-wide: by rating agencies in deciding subordination levels, by investors in selecting assets, by accountants in preparing financial statements, and by regulators in assessing capital adequacy. These models were reviewed by experts, tested against data and failed miserably – yet continued to be used. There were a number of fatal flaws: models were mis-specified or misapplied; data were censored; feedback loops and correlations were ignored; credit modeling was turned over to market risk modelers; and most importantly, incentives and cultures were broken. However, in today’s market, models have made a roaring come back and the industry relies on them even more than before. In this talk, Golding highlights what went wrong, how we should have known better, and lessons for modelers and financial engineers going forward.

Event Category
Financial Mathematics Seminar