Emily Flitter
Financial Post
Regulators published global guidance on Wednesday to make granting home loans more rigorous, five years after weak lending standards in the U.S. mortgage market spiralled into the worst financial crisis in decades.
The Swiss-based Financial Stability Board (FSB), a regulatory task force for the world’s top 20 economies, said poorly underwritten home loans contributed significantly to the global financial crisis.
Home prices have tumbled in many countries, including the United States, Ireland and Spain, contributing to major economic difficulties since the financial crisis erupted in 2008.
“Had these principles been followed in those jurisdictions, problems would have been much less acute,” said Guillermo Babtz, Mexico’s bank regulator who headed the FSB’s effort.
National supervisors from G20 countries will be expected to ensure that lenders verify and document each applicant’s job status, income and ability to repay the loan in full.
Countries like Britain have already cracked down on so-called “liar loans” where a mortgage is based on an applicant’s declared rather than verified income.
Supervisors should also set “appropriate” loan-to-value ratios or how much of the purchase price can be borrowed.
The FSB stopped short of requiring a minimum LTV ratio, saying it would be difficult to apply such detailed guidance globally. The step would intrude on domestic political sensitivities in the supply of credit.
The principles also require mortgage providers to check the total debt-to-income levels of borrowers to ensure they can afford to repay loans; to perform sound appraisals of properties to ensure that loans have adequate collateral; and to use sound and reliable mortgage insurance companies.
Countries will have two years to implement these principles and report back to the Financial Stability Board, which will conduct peer reviews of mortgage lending practices.
G20 finance ministers meet this week to review progress on a welter of new financial rules and principles, such as on home loans, that their leaders have pledged to implement.