Comptroller of the Currency John C. Dugan, speaking in Tokyo on Wednesday, said that regulators around the world should establish minimum underwriting standards for all mortgages as a response to a problem that sparked the financial crisis of the past two years. He made the remarks during the Special Seminar on International Banking and Finance sponsored by the Japan Financial News Co.
Dugan said he is normally much more comfortable with markets establishing the terms for credit extension but that “if ever there was a demonstrated need for … intervention, the searing U.S. mortgage market experience of the last several years fits the bill.”
The standards he called for “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.” Dugan, whose office is a branch of the Treasury Department, added, “these standards would not dictate every underwriting feature of a mortgage product; instead, they would focus on core practices of sound underwriting on which there is the broadest consensus.”
He said the standards should not be the same everywhere in the world because, “each country has its own unique credit culture and different approaches to mortgage financing, and what works well in one might not work well in another.”
He suggested at least three underwriting standards that should be mandated in the U.S.:
- Verification of income and assets;
- Meaningful down payments; and
- 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.
Dugan said it is critical that any new mortgage regulations apply to all providers to prevent the kind of competitive inequity and pressure on regulated lenders that eroded safe and sound lending practices in the past. He said that with housing prices sharply increasing in recent months in some countries, this is a good time to address mortgage underwriting. The Joint Forum, an international regulatory group that he chairs, has been asked to provide recommendations to the Financial Stability Board, an international organization that includes senior representatives of national financial authorities, to address differences and gaps in the regulation of financial services around the world. One set of recommendations under consideration involves minimum mortgage underwriting practices, he said.