The Basel Committee on Banking Supervision discussed the topic of mortgage insurance and its role in the market structure, underwriting cycles and policy implications, according to its new report on the subject.
The report examines the events of the past few years, particularly those in the global financial crisis beginning in 2007, which showed that mortgage insurance (MI) is subject to significant stress in the worst tailwind events.
As a result, the forum addressed the interaction of mortgage insurers with mortgage originators and underwriters, while making a set of recommendations for policymakers to reduce the likelihood of MI stress in future tailwind events.
Policymakers and supervisors are advised by the forum to consider various standards, including requiring mortgage originators and mortgage insurers to align their interests, maintain strong underwriting standards and build long-term capital buffers and reserves.
During a roundtable discussion on MI and its representation within the industry, regulation and academia, the forum also noted that safe underwriting for mortgage insurance carries no risk.
"It is likely that wide-scale failure will only occur if weak and pervasive mortgage origination standards have previously passed contagion from the banking sector to the insurance sector," the forum members said. "Otherwise failures are likely to be occasional and idiosyncratic."
The forum also pointed out that MI might constitute a positive part of a safe mortgage system in jurisdictions where it is used. However, MI may mask risk if wrongly or poorly used.
Additionally, the forum stated that MI is less necessary and less beneficial in jurisdictions where mortgage originations are characterized by low loan-to-value ratios.
Alignment between private sectors and the government is also important, the Basel Committee suggested. Thus, politicians need to create a set of standards featuring items such as loan-to-value restrictions, debt-to-income limits and restrictions on sources of down payments, based on the report's recommendations.
"These measures may be introduced in response to the identification of a growing risk rather than being part of the standard operating environment," the forum members said.