Global regulators tighten home loan standards
Global regulators on Wednesday proposed tighter standards on mortgage lending in a bid to avoid a repeat of the US sub-prime home loan crisis that sparked the 2008 financial crisis.
"As the global crisis demonstrated, the consequences of weak residential mortgage underwriting practices in one country can be transferred globally through securitisation of mortgages underwritten to weak standards," said the Financial Stability Board.
"As such it is important to have sound underwriting practices at the point at which a mortgage loan is originally made," the group of regulators from the 24 most advanced economies said.
Among standards to be imposed include a requirement that lenders make "reasonable inquiries" and steps to verify a borrower's repayment capability.
When establishing the amount of loan to be approved, lenders should ensure that there is sufficient allowance for normal living expenses or sudden changes such as a salary cut.
The new standards are under consultation until December 9, 2011.
The US sub-prime crisis erupted in August 2007 when many low-income home owners could no longer keep up mortgage payments on their property, partly because interest rates were rising and partly because they had taken out loans with built-in incremental increases in repayments.
In many cases, the borrowers found themselves with loans that they were unable to service. It also emerged that some lenders granted such loans on the basis of false or weak documentation.
The resulting loan defaults quickly had widespread repercussions because lenders had repackaged the loans, and the repayment streams, under a system known as securitisation.
In the process, low-grade assets, the risky loans, acquired higher grade credit ratings and were bought by investment funds and banks around the world.
As default rates rose, these assets lost value dramatically, exposing their holders and leading to a collapse in the property and then financial markets.
© 2011 AFP