Mortgage debt should undergo regular stress tests, and mortgage insurers should be required to shore up their reserves in case there's another global economic downturn, a consortium of global regulators said in a report issued Monday.
The Basel Committee on Banking Supervision, including banking regulators from 27 countries, in tandem with the International Organization of Securities Commissions and the International Association of Insurance Supervisors issued a report calling for tougher underwriting standards as well as greater oversight of mortgage insurers.
The goal of the report's recommendations is to safeguard the housing finance system from collapse in the event one or more major mortgage insurance companies becomes insolvent as a result of bad mortgage loans. Should a major mortgage insurer fail, the costs of the bad loans would have to be absorbed by the lenders, more than likely during a period of economic downturn, thus creating ‘systemic risk’ to the housing finance system. Such risk is what helped lead to the collapse of the subprime mortgage market in 2007, which in turn triggered the global economic crisis that followed.
Mortgage insurance is required only in the U.S., Canada, France and Australia. In the U.S., Fannie Mae, Freddie Mac and other government-sponsored housing enterprises require it on loans they purchase with loan-to-value ratios above 80%.
Some mortgage insurance companies have filed lawsuits against the major lenders, accusing them of falsely representing the quality of loans they were asked to insure.
Federal authorities earlier this month filed a lawsuit against Bank of America Corp., accusing it of misleading investors in an $850 million mortgage-backed bond. Meanwhile, Fabrice Tourre, a former Goldman Sachs Group Inc. vice president, earlier this month was found liable for fraud in a failed $1 billion investment involving securitized mortgage debt.
As the Basel Committee's report points out, two U.S. mortgage insurers, PMI Mortgage Insurance and Republic Mortgage Insurance, were placed under state supervision due to mounting losses following the housing crisis and three others still have sub-investment grade credit ratings. Some of these insurers saw their capital reserves almost completely depleted as a result of the losses.
Many mortgage insurers are yet to bear the full brunt of their losses resulting from the housing meltdown. Some have since gone out of business, and there has been considerable consolidation in the market in recent years, as insurers face thinning profit margins and increasing regulatory compliance.
To download a copy of the report, click here.