Home > Newsroom > FSB Publishes Peer Review on Residential Mortgage Underwriting and Origination Practices
FSB Publishes Peer Review on Residential Mortgage Underwriting and Origination Practices
-Recent Update: FSB has issued guiding principles based on this review
Report on October 26, 2011
On 17 March, 2011, the Financial Stability Board (FSB)
published a Peer Review 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
securitization markets. Such spillovers highlight the importance for financial
stability of sound residential mortgage underwriting practices across the FSB
membership.
Since
there are no internationally agreed standards to act as a benchmark, the review
provides a comprehensive picture of existing practices in these areas and draws
lessons going forward. The findings of this review are based on responses to a
questionnaire designed to gather information from 22 FSB member jurisdictions
on existing underwriting and origination practices.In particular, the review gathers information
from each member jurisdiction on the following topics:
-
Overall industry structure and
regulatory and supervisory framework for mortgage origination;
-
Consistency of oversight and
communication between supervisors involved in mortgage-related activities;
- Gaps in oversight and weaknesses in
practices previously identified by the authorities;
-
Any policy reforms currently underway
and lessons from the crisis;
-
Requirements, standards or best
practices that currently apply in mortgage underwriting, in particular the
areas listed in the Joint Forum report under Recommendation 7 relating to
measurement of a borrower’s ability and willingness to repay;
- Public disclosure of underwriting
practices.
Interestingly,
the peer review found that nearly all mortgage lenders across the FSB
membership are prudentially regulated, conduct-regulated by consumer protection
authorities, or in some cases both. Most FSB member countries have a single
regulator overseeing mortgage lenders. The US is an example of a jurisdiction
in which mortgage lenders can be regulated by multiple authorities, which can
differ depending on the type of financial institution. While all US mortgage
lenders are subject to one or more federal or state – or both– legal systems,
the strength and intensity of oversight of these companies varied prior to the financial
crisis, with deposit-taking institutions, bank holding companies and holding company
subsidiaries generally subject to more rigorous supervision than many
independent mortgage brokers and originators. The initial wave of problem loans
that became delinquent before the US economy turned down (and unemployment
rose) were disproportionately originated by lightly regulated mortgage
companies.
One of the key findings from the review is that most FSB members
do not have adequate public disclosure of information concerning the health of
their mortgage market, including underwriting practices and market trends,
encompassing all mortgage market participants
List
of recommendations
1. Supervisors should fully implement
the Joint Forum recommendations and develop a framework for sound residential
mortgage underwriting standards and practices that is as explicit and specific
as possible, and which can be monitored and supervised against according to their
particular national circumstances. The adopted framework should be published
and maintained in a manner that is readily accessible to all interested
parties.
2. The FSB will develop an
international principles-based framework for sound underwriting practices.
After providing sufficient time for implementation, the FSB will conduct a follow-up
review to assess progress made in implementing the framework. The Dodd-Frank
Act's underwriting standards will require income verification for all mortgages
in the US.
3. 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.
4. 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.
5. Regulators and supervisors should
ensure that mortgage insurers, where active, are appropriately regulated and
robustly capitalized in order to avoid regulatory arbitrage. The Basel
Committee on Banking Supervision (BCBS) and the International Association of Insurance
Supervisors (IAIS) should jointly consider conducting a study of the regulatory
framework for mortgage insurers.
6. Authorities should collect and
disclose enough detailed data to allow a comprehensive view of residential
mortgage lending activities. Regular reporting of developments in the residential
property market should be published at least annually, either in a publication devoted
entirely to that subject or, where relevant, in a financial stability report.
> Download the Peer Review Report
> Financial Stability Board website
Related Links & Resources
< Back to News
