September 20, 2010 / 3:25 PM / 9 years ago

Global regulators launch home-loan standards study

LONDON, Sept 20 (Reuters) - Regulators launched a global probe on Monday into how lenders grant home loans, a sector whose previous lax practices sowed the seeds of the credit crunch.

“Problems arising from poorly underwritten residential mortgages contributed significantly to the financial crisis that began in 2007,” the Financial Stability Board said in a statement.

The FSB, made up of central bankers, supervisors and treasury officials from the Group of 20 leading countries, has sent a detailed questionnaire on underwriting practices to all member nations.

The board, chaired by Bank of Italy Governor Mario Draghi, will discuss the responses later this year and publish the review in early 2011. The FSB has no lawmaking powers but G20 countries have pledged to implement its recommendations and findings.

So far the Switzerland-based FSB has focused on implementing pledges to reform wholesale financial practices such as derivatives trading, hedge funds, accounting and supervision.

The review of home loan practices shows how the FSB is moving into retail sectors as regulators across the world push consumer protection higher up their domestic agendas.

Supervisors were alarmed at how defaults in a small part of the U.S. home loans market snowballed into a global crisis that forced governments to shore up banks.

“The review will survey existing practices across the FSB membership, including recent actions taken by national authorities to promote sound practices and draw internationally applicable lessons,” the FSB said.

Watchdogs are already cracking down on lax standards, with Britain’s Financial Services Authority unveiling draft rules in July to ensure all mortgage customers can afford their repayments.

Britain will effectively outlaw self-certification loans — also dubbed “liar loans” — whereby the borrower does not have to provide full proof of income.

The European Union’s executive European Commission will put forward measures next year to encourage responsible lending and borrowing across the 27-country bloc to ensure that credit markets don’t operate in a way that can lead to over-indebtedness, defaults and foreclosures.

Central banks are mulling how to use tools to cool credit markets when property bubbles appear, such as capping loan to property price ratios.

The FSB review will look at best practices for measuring a borrower’s ability to repay a loan and the challenges faced by underwriters or originators that operate in several countries.

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