The Financial Stability Board (FSB) has released its Principles for Sound Residential Mortgage Underwriting PracticesFSB is an international body that was established after the 2009 G-20 Summit to monitor and make recommendations about the global financial system.  Its members include representatives of all G-20 major economies and it is based in Basel, Switzerland.

According to the Board, the recommendations issued today are meant to address "problems arising from poorly  underwritten residential mortgages (which) contributed significantly to the global financial crisis."  As that crisis demonstrated, the consequences of weak underwriting practices in one country can affect the global economy through securitization of those poorly underwritten mortgages.  "As such," it says, "it is important to have sound underwriting practices at the point at which a mortgage loan is originally made."

The principles span the following areas, some of which proved to be particularly weak during the global financial crisis:

  • Effective verification of income and other financial information;
  • Reasonable debt service coverage
  • Appropriate loan-to-value ratios
  • Effective collateral management; and
  • Prudent use of mortgage insurance.

Adair Turner, chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation said, "Had these principles been in place prior to the financial crisis, markets would have been much better protected from the problems of poor quality or unaffordable lending."

The report was released late Wednesday afternoon. Further analysis and detail is forthcoming.

Meahwhile here is the actual report:  Principles for Sound Residential Mortgage Underwriting Practices