Problems arising from poorly underwritten residential mortgages contributed significantly to the financial crisis that began in 2007. The securitization of these poorly underwritten mortgage loans, particularly subprime loans originated in the US, transmitted the eventual losses to the banking, securities, and insurance sectors globally. The UK and US were two of the jurisdictions that were most affected, having experienced a surge in mortgage lending and housing price growth. In the process, lenders in those countries had placed greater emphasis on home valuations than on traditional assessments of the borrower’s capacity to repay and developed new, riskier products that made use of more relaxed product terms, liberal underwriting and increased lending to higher-risk borrowers (e.g. those that did not have the ability to repay under the loan terms). These developments eventually resulted in significant losses for both consumers and financial institutions.

The robustness of mortgage underwriting practices is therefore important for financial stability, including in the current juncture, considering that some jurisdictions continue to experience rapid increases in housing prices and associated growth in mortgage lending. 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. Consistent with the size of the UK and US residential mortgage markets as a percent of gross domestic product (see Figure 1), the respective governments took considerable far-reaching actions as financial institutions faced worsening performance in their mortgage credit portfolios, which in some cases had posed risk to their solvency and viability as well as the overall stability of the financial system.