Dugan Pushes 'Minimum' Underwriting Standards
Office of the Comptroller of the Currency (OCC) head John Dugan urged regulators to establish minimum underwriting standards for mortgage origination. Dugan told a group of regulators from a number of countries that mandating underwriting standards “would be the true minimums that we believe must be observed to keep lenders from risking too much loss to both themselves and their customers,” during a speech in Tokyo on international banking and finance sponsored by the Japan Financial News Company. Noting that every country’s economic condition is different, Dugan said each country’s underwriting standards should vary. “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,” Dugan said. “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.” For the US, Dugan called for three mandatory standards — verification of income and assets, meaningful down payments and qualifying borrowers based on their current ability to pay the later, higher payments of an adjustable-rate or other mortgage product with a payment structure that increases over time. Dugan said income and asset verification standards reduce fraud, delinquency, default and foreclosure. He warned regulators this verification practice should be limited to circumstances "where it clearly can be justified.” OCC data shows borrowers are less likely to walk away from a mortgage if they have invested some of their own money in the purchase of the property, Dugan said. He added there must be a balance between creating a meaningful down payment requirement and creating one so stringent that creditworthy borrowers are unable to purchase a home. Borrowers with mortgages payment structures that increase over time historically relied on house price appreciation as the ultimate source of repaying the loans, “and as we have learned all too painfully in the last two years, house prices can certainly go down as well as up,” Dugan said. He also called for the abolition of negative amortization mortgages, which he said allow borrowers to dig themselves further into debt. “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,” he added. Dugan said industry-wide underwriting standards level the playing field for all originators and foster an environment of responsible lending. While he said he prefers markets regulate themselves and underwriting standards develop between willing lenders and willing borrowers, “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 added: “If ever there was a demonstrated need for such intervention, the searing US mortgage market experience of the last several years fits the bill.” Write to Austin Kilgore.