Regulators should consider requiring home lenders and mortgage insurers to align their interests, to stop mortgage insurance stress and failure, according to the international supervisory Joint Forum.

Mortgage lending and insurance are at the heart of the global financial crisis, forum Chairman Thomas Schmitz-Lippert says.

Regulators should ensure lenders and insurers maintain strong underwriting standards and must be alert to deterioration in standards, the forum says.

“Supervisors should require mortgage insurers to build long-term capital buffers and reserves during the troughs of the underwriting cycle to cover claims during its peaks.” 

They must also be aware of cross-sector arbitrage from accounting differences between insurers’ technical reserves and banks’ loan loss provisions, and from differences in capital requirements, it says.

Supervisors should apply Financial Stability Board principles on mortgage underwriting, which require both insurance and banking expertise.

The forum comprises the International Association of Insurance Supervisors, the International Organisation of Securities Commissions and the Basel Committee on Banking Supervision.