Risks Associated with Mortgage Banking: Liquidity Risk
Posted on April 13, 2009
Filed Under Mortgage | Comments Off
Liquidity risk is the risk to earnings or capital arising from a bank’s inability to meet its obligations when they come due, without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the bank’s failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.
In mortgage banking, credit and transaction risk weaknesses can cause liquidity problems if the bank fails to underwrite or service loans in a manner that meets investors’ requirements. As a result, the bank may not be able to sell mortgage inventory or servicing rights to generate funds. Additionally, investors may require the bank to repurchase loans sold to the investor which the bank inappropriately underwrote or serviced.
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