In March 2011 the Financial Stability Board (FSB) published a thematic review of residential mortgage underwriting and origination practices. Based on the findings of the review, six recommendations were set out, one of which asked the FSB to develop an international principles-based framework for sound underwriting practices. After providing sufficient time for implementation, the FSB will conduct a follow-up review to assess progress made in implementing the framework. Given that the underlying risks can differ across jurisdictions, the Principles are high-level rather than aimed at detailed international standards. As the global crisis demonstrated, the consequences of weak residential mortgage underwriting practices in one country can be transferred globally through the securitization 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 As such, it is important to have sound underwriting practices at the point at which a mortgage loan is originally made. In response to the crisis, a number of FSB members have encouraged stricter underwriting practices so as to limit the risks that mortgage markets pose to financial stability and to better safeguard borrowers and investors. Internationally agreed Principles will help to strengthen residential mortgage underwriting practices and enable supervisors to more effectively monitor and detect the erosion of underwriting practices particularly when the housing market is booming.

The FSB Principles are intended to apply to loans to individuals (consumers) that are (i) secured either by a residential mortgage or by another comparable security commonly used in some jurisdictions on immovable residential property; (ii) secured by a right related to immovable residential property; and (iii) loans for which the purpose is to acquire or retain rights in immovable residential property. However, some or all of the Principles may not necessarily be appropriate or applicable for certain niche forms of finance.2 Jurisdictions should nonetheless seek to apply all Principles that are relevant. In all instances, a robust and effective assessment of individual affordability must underpin any sustainable lending model. It is important to note that the Principles focus on the credit granting decision rather than wider issues of credit risk management.