Financial Stability Board (FSB) publishes peer review on residential mortgage underwriting and origination practices
The FSB report contains six recommendations to promote sound residential mortgage underwriting practices globally, and hence financial stability:
• National supervisors should develop a framework for sound residential mortgage underwriting standards and practices that is as explicit and specific as possible.
• The FSB will develop an international principles-based framework for sound underwriting practices.
• Financial authorities should regularly review their standards on residential mortgage underwriting and adjust them as appropriate to address the build-up of risks in the housing market or to help counteract a lending boom that pose significant risks to financial stability.
• Policymakers should broaden the regulatory perimeter to ensure all residential mortgage lending activity is supervised and/or regulated to safeguard both borrowers and investors and to promote financial stability.
• Regulators and supervisors should ensure that mortgage insurers, where active, are appropriately regulated and robustly capitalised in order to avoid regulatory arbitrage.
• Authorities should collect and disclose enough detailed data to allow a comprehensive view of residential mortgage lending activities.
Mario Draghi, Chairman of the FSB, said “National authorities are taking actions to promote sound residential mortgage underwriting practices in the wake of the crisis.” He added that “These actions should be complemented with regular public reporting on developments in the mortgage market as well as regular monitoring that mortgage lenders of all types comply with minimum standards for underwriting.”
Supervisors and regulators will need to maintain momentum in improving lending practices. Internationally agreed principles that draw on the Joint Forum’s recommendations could help to strengthen residential mortgage underwriting practices.
Tiff Macklem, Chairman of the FSB’s Standing Committee on Standards Implementation, said that “the peer review extracts useful lessons from current experience, highlights best practices being followed in member jurisdictions, and illustrates some potential high-level principles that could guide future standard-setting.”
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