Navigating emerging model risks: Model validation in the current economic environment
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The recent downturn in the housing market has exposed certain weaknesses in mortgage credit risk models’ ability to make accurate credit loss forecasts. At an institutional level, performance of these models is under closer scrutiny by management, auditors, and regulators. Additionally, the risk profiles of companies’ financial estimates are growing as management addresses model weaknesses by implementing changes to these models. While core model risks will always be present, it is important that companies continuously assess and address emerging model risks.