Financial Stability Board (FSB) publishes peer review on residential mortgage underwriting and origination practices
March 18, 2011:
The Financial Stability Board (FSB) has published a peer review report on residential mortgage underwriting and origination practices in FSB member jurisdictions.
Problems arising from poorly underwritten residential mortgages contributed significantly to the financial crisis that began in 2007. As the global crisis showed, the consequences of weak underwriting practices in one country can be transferred globally through securitisation markets. Such spillovers highlight the importance for financial stability of sound residential mortgage underwriting practices across the FSB membership.
The Joint Forum, in its Review of the Differentiated Nature and Scope of Financial Regulation, recommended actions – endorsed by the FSB – that supervisors and policymakers should take to promote consistent and effective underwriting practices for residential mortgage origination. These included:
• Supervisors ensuring that mortgage originators adopt minimum underwriting standards that focus on an accurate assessment of each borrower’s capacity to repay the obligation in a reasonable period of time. The minimum standards adopted should be published and maintained in a manner accessible to all interested parties.
• Policymakers ensuring that different types of mortgage providers, whether or not currently regulated, are subject to consistent mortgage underwriting standards, and consistent regulatory oversight and enforcement to implement such standards.
• National policymakers establishing appropriate public disclosure of market-wide mortgage underwriting practices.
The peer review report provides a comprehensive picture of existing practices and oversight – including recent crisis-induced reforms – in the areas covered by the Joint Forum’s recommendations and draws internationally applicable lessons.
Overall, national authorities are making good progress in following the Joint Forum’s recommendations. Nearly all mortgage lenders across the FSB membership are regulated, either by prudential supervisors or consumer protection authorities, and in some cases by both. As a result, industry practices are moving in the right direction. However, most FSB member jurisdictions do not yet have adequate public disclosure or monitoring of information concerning the overall health of their mortgage market, including evolving mortgage underwriting practices and market trends.
The FSB report contains six recommendations to promote sound residential mortgage underwriting practices globally, and hence financial stability:
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