FSB Publishes Peer Review on Residential Mortgage Underwriting and Origination Practices

Date Published 3/24/2011
Author Marja Hoek-Smit
Theme Housing Finance Policy

-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

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