OCC Calls for Minimum Mortgage Standards

By:
Kirk Haverkamp | November 19, 2009

The U.S. Comptroller of Currency is urging that all nations adopt minimum mortgage lending standards to avoid some of the practices that led to the recent financial crisis, including bans in the United States on certain types of mortgages that have gotten borrowers into financial difficulty.

Addressing an international banking and finance conference in Japan, Comptroller of Currency John Dugan specifically urged that the U.S. virtually eliminate so-called “liar loans,” mortgages issued without documentation of income or assets, and also prohibit mortgages in which the monthly payments do not cover the full interest charges generated by the loan, resulting in “negative amortization” in which the borrower’s debt keeps growing.
 
Both types of mortgages were implicated in last year’s collapse of financial markets as large numbers of homeowners began to default on their mortgages.
 
He also said the United States should require “meaningful” down payments on all loans and, for mortgages where the monthly balance due increases over time, require that borrowers be qualified based on the later, higher payments rather than the lower payments at the beginning of the loan.
 
Such 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," he said. "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."
 

Targets problematic mortgage types

 
In the United States, Dugan noted that low- and no-documentation mortgages, the so-called “liar loans” because they didn’t require proof of a borrower’s earnings, have opened the door to misrepresentation and fraud, and have performed very poorly in terms of delinquencies and foreclosures.
 
The lack of meaningful down payments, he said, has had a ‘pernicious effect,” enabling homeowners who have little financial stake in the properties they own to simply walk away when times get tough. He acknowledged that determining what constitutes a meaningful down payment will be difficult, in order to avoid turning away otherwise creditworthy borrowers.
 
"We will need to exercise great care in striking that balance," he said.
 
Dugan said such lending standards should not be the same for all nations, but that each should adopt standards that meet its own particular needs.
 
"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 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."
 

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