The New York Times is reporting a story today about banks slowing their foreclosure process as a result of cutting corners to speed their way through the legal process. It turns out that the foreclosure process requires lots of signatures by the foreclosing entity and some banks deployed robo-signers–people who signed up to 10,000 documents a month. The problem is that part of what they sign says that they personally had reviewed all the documentation, which, of course, is not possible.
The result of this realized operational risk is that foreclosures and subsequent sales have slowed, tying up banks’ capital for longer. We have long argued that operational risk is the linch pin in risk management. A linch pins keeps the wheel from sliding off the axle it rides on. The analytic approach used to value credit portfolios is a critical component of the overall risk management process, but the operating risks are no less important, as we read today.