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, according to US Comptroller of the Currency John Dugan. These standards would form the minimum that must be observed to keep lenders from risking too much loss to both themselves and their customers.

In a speech to a seminar on international banking and finance sponsored by the Japan Financial News Company, Dugan explained: "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."
The Comptroller added that these standards should not be the same everywhere in the world.

"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 continued. "What I am suggesting, though, is that each country should articulate what those standards are for their lenders, and should report periodically on how well those standards are working."

Dugan points to the US as an example, where at least three underwriting standards should be mandated. First is verification of income and assets and second is meaningful down payments. Third, for mortgages with monthly payments that increase over time, borrowers should qualify on their ability to afford the later, higher payments rather than just the initial, lower payments.

In addition, Dugan says it is critical that any new mortgage regulations apply to all providers in order to prevent the kind of competitive inequity and pressure on regulated lenders that eroded safe and sound lending practices in the past.

The Joint Forum has been asked to provide recommendations to the Financial Stability Board 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.