International financial regulators on Friday issued new recommendations to toughen up regulation of the industry, including the mortgage sector, in a bid to prevent a repeat of the global credit crisis.
“There are some key recommendations in this report that, once implemented, will reduce those gaps and strengthen regulation of the financial system,” said John Dugan, who chaired the group of regulators until the end of 2009.
The list of 17 recommendations covers the banking, insurance, securities, mortgage and hedge fund sectors.
Under the new guidelines, lenders offering “teaser-rate mortgages” — home loans that allow very low initial monthly payments — should no longer use the lower rates as the basis when calculating borrowers’ ability to pay.
They also “should not consider future house price appreciation as a factor in determining the ability of a borrower to repay a mortgage,” the Joint Forum group said in a statement.
The Joint Forum is made up of the central bankers group, the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors.
Subprime or higher risk US home mortgages have been blamed for triggering the financial crisis during which once-venerable banks such as Lehman Brothers went bust.
Lenders had approved loans for people with a poor credit history, often enticing them with low interest rate payments for the initial months.
However, when interest rates suddenly shot up, borrowers were unable to meet their higher monthly payments. With the ensuring collapse in housing prices, borrowers were also unable to refinance their mortgages, sending the problem into a vicious circle which led to the worst global slump since the 1930s.
The poor quality subprime mortgages were packaged and then sold on to investors as securities by mainstream banks, with subsequent defaults sparking a global credit crunch.
In its recommendations, the Joint Forum called for standards that “focus on an accurate assessment of each borrower’s capacity to repay” their loans.
The Joint Forum also broadened the regulatory scope to cover the hedge fund industry, asking that these groups be required to identify sources of systemic risk and to allow for monitoring.
“Hedge funds have been clearly identified as one of the most significant group of institutions in the ‘shadow’ banking system,” it said.
