Consultant Zone

International mortgage underwriting practices

On the 26th October 2011 the Financial Stability Board (FSB) issued a paper for public consultation, titled ‘Principles for Sound Residential Mortgage Underwriting Practices’.

The FSB was established to co-ordinate at international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory and supervisory policies, in the interests of financial stability.

This was against the background of the problems arising from poorly underwritten residential mortgages that have contributed significantly to the global financial crisis. The consequences of weak residential mortgage underwriting practices in one country can be transferred globally through securitisation of mortgages that were poorly underwritten and the FSB wants its proposals to cover all lending secured on residential property, including Buy to Let.

The final recommendation in the paper proposes that all jurisdictions should provide for appropriate monitoring and supervision of mortgage underwriting practices and that the level of oversight on individual lenders should be based on the risks they pose to the financial system.

We have carried out due diligence checks on a number of mortgage portfolios both in the UK and Europe, and are of the opinion that underwriting standards over the past 10 years have been poor. So anything that promotes better standards and a more consistent approach for the future needs serious consideration.

The CML are consulting with their members before issuing a reply to this initiative.  However, to have a ‘one size fits all’ process within the UK alone looks like a huge challenge, and we are not convinced it could be achieved internationally. In its present form the proposal looks like a non-starter, but is sure to create interesting debate.