Global regulators have proposed, in draft guidelines published on 26 October, that lenders verify the capability of a borrower to repay a home loan and enforce stricter limits on amounts lent.
The Financial Stability Board (FSB), a regulatory body for the world’s G20 economies, commented that the financial crisis has shown how one country’s weak lending standards can spread across national borders.
The crisis started in 2007 when lower-income American homeowners began defaulting on their loans. The impact spread through banks across the globe, with subprime loans bundled and sold to banks in Europe.
“In all instances, a robust and effective assessment of individual affordability has to underpin any sustainable lending model,” said the FSB in a statement accompanying its draft principles.
The proposal includes an “appropriate” down payment “drawn from the borrower’s own resources”, as high loan-to-value (LTV) ratios are worse than a high proportion of initial equity, said FSB, adding that LTV ratios should not be eased when the property market is booming.
A number of countries, including those in the European Union (EU), had already implemented tighter home loan rules right after the financial crisis hit the UK.
The finalised principles on home loan underwriting will take effect in early 2012.
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