THE MORTGAGE INDUSTRY'S ROLE IN THE CURRENT GLOBAL FINANCIAL MELTDOWN: HISTORICAL PERSPECTIVE AND RECOMMENDATIONS.

This paper examines the two specific areas where the mortgage industry's transmission of "mispriced" assets into the financial system led to the deterioration of investor's confidence in the entire financial system. These two areas, the regulatory environment that created an asset bubble in mortgage based collateral and the rapid growth of structured instruments (including credit-based derivatives) in our view, significantly impacted the magnitude and scope of the problem. We show that each had a direct impact on the existing credit framework in different ways and adversely affected the risk assessment of mortgage related collateral. The exposure that financial institutions have to this "mispricing" of credit, in a variety of ways, led to the volatility observed in financial markets since the fall of 2008. We conclude the paper by emphasizing that future credit risk frameworks will require greater emphasis on consistent global standards regarding securities trading and risk management practices. Techniques and methods used for assessing the creditworthiness of financial obligations, collateral, securitizations, and counterparties are required not only to be robust but adhered to by the management of financial institutions and investors in general. We argue that until major reforms in regulation & financial product risk analysis are implemented, investor confidence will not return. Actions that will help the proposed "bailout" achieve its goal of restoring investor confidence and trust in the financial system are hereby suggested. [ABSTRACT FROM AUTHOR]