A group of international financial regulators known as the Joint Forum is recommending a code of practice to keep the lenders’ mortgage insurance (LMI) sector healthy and functional.

The Joint Forum consists of the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions, the International Association of Insurance Supervisors and the Bank for International Settlements.

Its report is inspired by the problems experienced in mortgage markets during the global financial crisis. When the US housing market collapsed in 2008, mortgage insurers’ creditworthiness was shattered, with some being taken over by regulators.

The report finds that the LMI market is most secure and efficient where both lenders and mortgage insurers are well-regulated and managed.

So it recommends originators’ and insurers’ interests should be aligned through measures like partial risk retention by lenders to give incentive to both parties to maintain standards.

Underwriting standards should also be maintained in both sectors, as lower standards in one will ultimately pressure the other to follow suit.

Mortgage insurers should be required to build capital reserves to carry them through the inevitable economic down cycles.

The Joint Forum says stability can be assured if both insurers and lenders are governed by the international principles developed by the Financial Stability Board.