FSB Principles for Sound Residential Mortgage Underwriting Practices
Internationally agreed principles for residential mortgage underwriting practices will strengthen banking practices and enable supervisors to more effectively monitor and detect the erosion of underwriting practices particularly when the housing market is booming.
The FSB Principles are intended to apply to loans to individuals (consumers) that are (i) secured either by residential mortgage or by another comparable security commonly used in some jurisdictions on immovable residential property; (ii) secured by a right related to immovable residential property; and (iii) loans for which the purpose is to acquire or retain rights in immovable residential property. It is important to note that the Principles focus on the credit granting decision rather than wider issues of credit risk management.
The Principles span the following areas, some of which proved to be particularly weak during the global financial crisis that started in 2007: (i) effective verification of income and other financial information; (ii) reasonable debt service coverage; (iii) appropriate loan-to-value ratios; (iv) effective collateral management; and (v) prudent use of mortgage insurance. The report also sets out an implementation framework to promote minimum residential mortgage underwriting standards, and describes tools that could be used to monitor and supervise these standards.