Which of the following comes under the heading of nontraditional mortgage product risks?
Which of the following comes under the heading of nontraditional mortgage product risks?
Reduced documentation adds risk to a mortgage loan. Institutions that rely on reduced documentation in the credit underwriting process may not adequately verify income and credit, which can increase the risk of default. To mitigate this risk, policies should require more thorough documentation when credit risk rises. Since the options A and B both address this risk and are identical, they are the correct choices. Option C, which concerns due diligence before entering third-party relationships, and Option D, related to accounting for recoveries on loans, do not specifically address the nontraditional mortgage product risks.
This option directly addresses one of the nontraditional mortgage product risks by highlighting the danger of relying on reduced documentation in the underwriting process. Reduced documentation can lead to insufficient verification of a borrower's ability to repay, increasing the risk to the lender. Clear policies to require more thorough documentation when credit risk increases are recommended to mitigate this risk. The fact that A and B are identical indicates a focus on this specific risk in nontraditional mortgage lending. Option C refers to due diligence in third-party relationships, which, while important, is not directly about the inherent risks of nontraditional mortgage products themselves. Option D relates to the accounting for recoveries on loans, which is not directly related to the unique risks posed by nontraditional mortgage products.