| The Comptroller of the Currency said now is the time for U.S. regulators to adopt stiffer requirements for underwriting guidelines at residential lenders. He identified three key areas that should be considered in underwriting home loans and called for equal adoption by bank and non-bank lenders.
Comptroller of the Currency John C. Dugan made his comments today in Tokyo at a seminar on international banking and finance sponsored by the Japan Financial News Co., according to a statement from his agency. He identified three standards that should be mandated in the United States. “When underwriting standards get so out of balance that they cause widespread damage to borrowers and lenders alike, it becomes necessary for regulators to act more prescriptively,” Dugan said in the statement. “If ever there was a demonstrated need for such intervention, the searing U.S. mortgage market experience of the last several years fits the bill.” First, U.S. lenders should verify income and assets. He said low- and no-documentation loans have performed “extremely poorly,” encouraged mortgage fraud and materially distorted the integrity of other underwriting standards.
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OCC photo of John Dugan |
“Regulators should consider prohibiting this practice except in very, very limited circumstances where it clearly can be justified,” Dugan stated.
He said borrowers must be required to make a down payment and pointed to data from the Office of the Comptroller of the Currency that indicated borrowers are much more likely to abandon their mortgage when they have no “skin in the game.” He acknowledged that more creditworthy borrowers might not require as big a downpayment as their less creditworthy counterparts.
Dugan also called for borrowers with increasing payments to be qualified based on the higher payments they could face in the future. He said that qualifying borrowers only on the initial payment “often implicitly relies on house price appreciation as the ultimate source of repayment of the loan — and as we have learned all too painfully in the last two years, house prices can certainly go down as well as up.”
In addition, he highlighted the poor performance of negative amortization loans and said any new regulations should apply to all borrowers regardless of who regulates their lenders.
Dugan urged regulators from around the globe to establish minimum underwriting standards for all mortgages made in their respective countries. He pointed to the lack of underwriting as “the problem that sparked the financial crisis” and noted that the timing is good to adopt such requirements as some international housing markets begin to recover.
The comptroller said such minimum standards would reduce risk to a sustainable level.
“These standards would not dictate every underwriting feature of a mortgage product,” Dugan stated. “Instead, they would focus on core practices of sound underwriting on which there is the broadest consensus.”
