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Banks Urged by FSB to Probe Mortgage Insurance’s Impact on Risk

Banks should carry out “prudent and independent” assessments of the protection offered by mortgage insurance policies to avoid making irresponsible loans, the Financial Stability Board said today in a statement on its website.

Mortgage insurance, which gives holders protection if they can’t make payments on their home loans, “should not be considered as an alternative” to due diligence by a bank into whether borrowers will be able to meet their obligations, the FSB said. Mortgage insurers should also be subject to oversight by regulators, it said.

Lehman Brothers Holdings Inc., once the world’s fourth biggest investment bank, fell victim in 2008 to a credit crunch driven by concerns over whether so-called sub-prime borrowers would be able to honor their mortgages. The bank’s failure sparked the biggest financial crisis since the Great Depression.

The FSB, which brings together financial ministry officials, central bankers, and regulators from the Group of 20 nations, made the recommendation as part of a set of guidelines on responsible mortgage lending.

While national regulators are free to “consider imposing” limits on the size of mortgage a bank can offer in relation to the value of the property, such curbs may not be needed if banks follow “sufficiently prudent” lending policies, the FSB said.

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