Why Stable Housing Markets Are When Risk Discipline Slips

Low defaults and a steady economy can make the mortgage market look safe. But periods of calm are often when lenders begin loosening the habits that keep risk in check – and the people best equipped to notice are increasingly absent from the rooms where those decisions get made.

That is the view of Clifford Rossi, who held senior risk roles at Countrywide, Washington Mutual, and Citigroup in the years leading up to the 2008 crisis. The concern, he says, is not that a crash is imminent. It is that the institutional memory needed to prevent one is fading.

Stability Breeds Its Own Risk

With the possible exception of FHA loans – government-backed mortgages often used by first-time and lower-down-payment buyers – defaults have remained low, and the broader economy has been relatively stable. In a benign environment like this one, Rossi says, the industry has to be careful not to drift too far as lenders expand loan products and ease qualifying standards.

When nothing appears to be going wrong, the pressure to match competitors and chase returns can override careful risk thinking. No single lender has to make a catastrophic decision for exposure to build. It only takes a steady drift toward looser standards while conditions feel favorable.

Rossi is careful to distinguish this from sounding an alarm. “The best chief risk officers are umpires,” he says. “They’re calling the balls and strikes as they come across the plate. They’re not saying yes to everything, they’re not saying no to everything.” What the industry needs, in his view, is measured vigilance rather than fear.

The Biases Never Left

Rossi describes sitting in board meetings around 2006 where executives argued the firm had to match a competitor’s pay option ARM program – an adjustable-rate mortgage that let borrowers pay less than the interest owed each month – or risk losing top salespeople and market share. “Herd mentality was clearly in evidence,” he says. “Recency bias, confirmation bias, anchor bias – you name it, I’ve seen it.”

He saw similar patterns across the institutions he worked at before the crisis, and he still encounters versions of them in conversations with mortgage executives today.

In Rossi’s view, how much risk a lender takes on ultimately comes down to the strength of its governance and board oversight – and to whether those boards can recognize their own biases. Those biases are not a flaw of one era’s system. They are a feature of human decision-making, and they do not disappear when a crisis ends. They go dormant until conditions feel favorable again.

When the People Who Remember Are Gone

Many of the risk managers who lived through 2008 have since retired or moved on. “People forget that institutional memory is just not there,” Rossi says.

Without them, the warning signs that once felt obvious can look like reasonable business choices. The danger also compounds across the industry. When multiple institutions underestimate risk at the same time – each watching the others and concluding that competitive pressure justifies looser standards – exposure builds across the whole system rather than at any one firm. That is not a theoretical scenario. It is a description of what happened in the years leading up to 2008.

“I am still surprised to this day that there’s a lot of that hubris and underestimation of what could be ahead,” Rossi says.

What This Means for Borrowers and the Market Now

Rossi sees new tools and policies as places where quiet risk can build. He believes AI has real potential to improve efficiency and compliance in mortgage lending, but argues it should be judged on how much risk it carries, not just the returns it promises – the same return-focused thinking that defined the pre-2008 market. He raises a similar concern about the Federal Housing Finance Agency’s lender choice policy, which lets lenders choose between competing credit scoring models. Lenders, he says, “are always going to pick the higher score in order to get their loans approved,” and his analysis shows that this raises credit risk for the investors holding those loans.

For borrowers, the effects are already showing. Rossi says mortgage rates near 7 percent are pushing buyers out of the market, and loosening loan standards without careful risk evaluation would eventually expose the people taking out those loans. The same instincts that lead institutions astray can catch individual buyers, too. Rossi says he would never enter a bidding war, since overbidding out of fear of missing out pushes up prices that are already stretched, especially for first-time buyers.

He also cautions against treating an adjustable-rate mortgage as short-term relief without a long enough time horizon. “Three years is probably not going to be a good financial outcome for you,” he says, while five to seven years leaves more room to recover. Homeowners insurance deserves the same scrutiny, as many insurers are declining to renew, canceling, or sharply raising premiums. At every level, risk is easiest to underestimate when conditions feel calm, and when they turn, the industry’s next stress test will be managed largely by people who were not in the room for the last one.