The landmark tentative settlement between JPMorgan Chase and federal regulators over soured mortgage loans punctuates an endless stream of litigation and loan repurchases resulting from an inherently broken loan manufacturing process and equally flawed representations-and-warranties framework. JPMorgan may be trying to put the sins of the past behind it. However, put-back risk for the industry is alive and well despite efforts by the federal government to impose what it deems to be appropriate mortgage underwriting standards.

Today, a false sense of security pervades the industry in large measure due to strict underwriting requirements imposed by the Consumer Financial Protection Bureau on mortgage lenders. Based on the characteristics of loans originated today, mortgage default risk is generally exceptional. The quality of the loan manufacturing process itself is a major determinant of default that occurs, most notably, due to deficiencies in underwriting and the collateral valuation process.

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