Among other credit enhancements, these factors generally include requiring borrowers to have higher credit scores, lower loan-to-value and debt-to-income ratios, and significant liquidity and net worth. Finally, lenders should establish appropriate allowances for estimated credit losses in their nontraditional mortgage portfolios and hold capital commensurate with the risk characteristics inherent in these products.
One final subject that is not addressed explicitly in our draft guidance, but that I believe is still important to supervisors and bankers, is mortgage fraud. There appears to have been a substantial upswing in suspected fraud related to residential mortgages in the past decade. Types of fraud include falsification of loan applications, identity theft, misuse of loan proceeds, and inflated appraisals.