Posted: Monday 23 April 2012
FSB principles for sound residential mortgage underwriting practices
By John Lunn
The Financial Stability Board (“FSB”) published the final version of its high level principles for sound residential mortgage underwriting practices on 18 April 2012 (the “Principles”). The Principles stem from a thematic review carried out by the FSB in March 2011, followed by a consultation on a set of draft principles in October 2011.
The FSB was established by the G20 nations in 2009 with responsibility for setting global standards to enhance the prospects of global financial stability. In general terms it operates as a vehicle to develop regulatory cooperation and technical input for the G20,
The Principles apply to loans made to individuals which are secured over a residential property, in other words mortgages made to consumers. However, the Principles may also apply to a degree to bridging loans and equity release mortgages where these are secured. Lending to high net worth individuals and buy-to-let loans will also be covered, though the Principles may apply in a different way than to the bulk of mortgage loans.
The FSB has avoided setting detailed prescriptive rules, recognising the differences in real estate markets, cultural differences and socioeconomic policies between states which shape national mortgage markets. Rather it has gone for high level principles which national governments will be expected to use as a framework for setting their own more detailed residential mortgage underwriting practices, to the extent that these do not already exist or do not already comply. The framework will be used as a basis to allow monitoring and supervision of mortgage lenders at a national level. States are left to decide how they introduce the framework, whether by legislation, regulatory or supervisory measures, or through industry practice. The ultimate aim is to help states improve their financial stability and prudential standards.
The Principles cover the following areas:
- effective verification of income and other financial information;
- reasonable debt service coverage;
- appropriate loan-to-value ratios;
- effective collateral management; and
- prudent use of mortgage insurance.
The FSB has stressed that “in all instances, a robust and effective assessment of individual affordability must underpin any sustainable lending model”.
Those of you monitoring the development of the UK’s mortgage regulation, and particularly the progress of the Financial Services Authority’s consultation paper on Mortgage Market Review: proposed package of reforms (CP11/31**) (“MMR”), will recognise the common themes appearing within the Principles as outlined above. The focus on a robust assessment of the consumer’s ability to pay the mortgage for the duration of its term is there as the cornerstone of both sets of measures, together with a focus on record keeping. The indications are, however, that the ultimate say on loan-to-value ratios in the UK is likely to remain with the new Prudential Regulatory Authority, rather than with the Financial Conduct Authority, and therefore sit outwith the mortgage conduct of business sourcebook.
My conclusion is that the FSA will have to do relatively little by way of tweaking its MMR to accommodate the Principles. This is perhaps not unsurprising, given the UK’s participation in the development of the FSB’s thinking on this. There will no doubt be some states with less developed mortgage market regulation that will need some time to raise their game to the level set out in the Principles.
