Alright, blindingly obvious is a tad harsh. But it surprised us that the proposals for improving mortgage underwriting standards made by John Dugan, US comptroller of the currency, were not already in force.
In a speech in Tokyo, Dugan proposed that “regulators around the world should address the problem that sparked the financial crisis of the past two years by establishing minimum underwriting standards for all mortgages made in their respective countries.”
These standards, Dugan said:
. . . would not be “best practices” or even suggested practices that regulators bless as appropriately prudent. Instead, they would be the true minimums that we believe must be observed to keep lenders from risking too much loss to both themselves and their customers.
With regard to the US, Dugan suggested three underwriting standards that should be made mandatory:
- Verification of income and assets - “Regulators should consider prohibiting [non-verification of income and assets] except in very, very limited circumstances where it clearly can be justified”
- Meaningful down payments - “Somewhere along the way, the U.S. mortgage market drifted away from this traditional requirement that borrowers put up real money — real equity or real skin-in-the-game — as a condition for obtaining a mortgage.”
- For mortgages with monthly payments that increase over time, qualifying borrowers on their ability to afford the later, higher payments rather than just the initial, lower payments.
He also proposed banning so-called “negative amortization” mortgages, which allow borrowers to make lower monthly payments by deferring interest payments. These deferred interest payments are added to the loan principal, which means borrowers owe more, rather than less, over time.Eminently sensible, certainly. But also distressing that two years into a massive crisis in US housing, Dugan’s suggestions remain merely that.
Related links:
CMBS investors have thin(ner) skins in the game – FT Alphaville
Bernanke’s remarks to the Federal Reserve Bank of Boston – FT
Discussion Paper 09/3 Mortgage Market Review October 2009 – FSA