Comptroller of the Currency John C. Dugan today called on regulators around the world to adopt minimum mortgage standards to address the ongoing mortgage crisis.
He noted that each country has its own “unique credit culture” and “different approaches to mortgage financing,” but that every country should establish a set of standards and periodically report on their performance.
In the United States, he believes three underwriting standards should be mandated, including verification of income and assets, meaningful down payments, and qualifying borrowers on the fully indexed interest rates tied to the mortgages they choose, not just the initial teaser rates.
That means no more stated income loans, no doc loans, no-money down mortgages, and other non-traditional home loans.
With regard to stated loans, he said, “Regulators should consider prohibiting this practice except in very, very limited circumstances where it clearly can be justified.”
And added that homeowners were much more likely to walk away from their mortgages if they had no skin in the game (amen).
Oh, and option arms should have no place in the new mortgage framework.
“We also should generally prohibit the lowering of monthly payments through so-called ‘negative amortization‘ mortgages, which have performed terribly,” Dugan added.
“These mortgages lowered initial monthly payments by allowing borrowers not to pay the full amount of interest due, with the unpaid interest added to the principal balance of the loan. Borrowers should not be allowed to dig deeper into debt with each monthly payment.”
These types of loans worked great when home prices were appreciating, but once home prices shifted direction, negative equity piled up quick.
Finally, Dugan noted that any new mortgage regulations should be applied to all loan providers to prevent any inequity in the space, meaning one group like mortgage brokers wouldn’t bear the brunt of all the changes.
(photo: woodleywonderworks)