The Financial Stability Board (FSB) published the FSB Principles for Sound Residential Mortgage Underwriting Practices that aim to provide a framework for different countries to set minimum acceptable loan underwriting standards so as to limit the risks that mortgage markets pose to financial stability and to better safeguard borrowers and investors.The principles acknowledge the importance of sound regulation in the form of self-regulation in establishing the minimum acceptable underwriting standards and also recommend the RICS Red Book of valuation standards for realistic property valuations.
Key highlights from one of the five principles ‘Effective Collateral Management’ include
1. Jurisdictions should ensure that lenders adopt valuation standards and methods that lead to realistic and substantiated property valuations. Standards such as the International Valuation Standards by the International Valuation Standards Council or the Red Book by the Royal Institution of Chartered Surveyors could serve as a starting point.
2. Jurisdictions should ensure that lenders require all valuation reports to be prepared with appropriate professional skill and diligence and that valuers, whether internal or external, meet certain qualification requirements.
3. Jurisdictions should recognise the importance of sound regulation and oversight of valuers, either through self-regulation or statutory means.
Commenting on the development, Sachin Sandhir – Managing Director, RICS South Asia said, “As a global standard setting body across real estate ad construction disciplines, RICS is committed towards the institutionalisation of best practices and uniform standards in valuation practice. The lack of adherence to sound valuation and financial principles led to the global financial crisis which has its origin in erroneous property lending and financing of long-term assets. In India, while the financial system is relatively stable in comparison to other markets, asset valuation is still at a nascent stage resulting in tremendous market volatility. RICS welcomes the FSB principles and encourages members from India such as the RBI, SEBI and Ministry of Finance to consider adoption of these principles for the creation of a healthy mortgage market, backed by sound valuation principles.”
Problems arising from poorly underwritten residential mortgages have contributed significantly to the global financial crisis. As the global crisis demonstrated, the consequences of weak residential loan underwriting practices in one country can be transferred globally through securitisation of mortgages underwritten to weak standards. As such, it is important to have sound underwriting practices at the point at which a mortgage loan is originally made.
These Principles will assist FSB members in their efforts to improve financial stability and prudential standards. They also refer to consumer protection issues that contribute to these objectives.
The FSB is an international body that monitors and makes recommendations about the global financial system. It was established after the G20 summit of April 2009 and its members include central banks, finance ministries and financial regulators from the world’s major economies. The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and the Ministry of Finance are members of FSB in India.
