FACTBOX: Regulators propose mortgage rules revamp

WASHINGTON (Reuters) - Top U.S. financial regulators on Thursday proposed steps to improve practices and oversight for credit markets and the mortgage industry in an effort to restore investor confidence.

The President's Working Group on Financial Markets, led by the U.S. Treasury and including the Federal Reserve, Securities and Exchange Commission and the Commodity Futures Trading Commission, hopes its recommendations will prevent a repeat of the current credit crunch sparked by failures of poorly underwritten subprime mortgages.

Among the regulators' key proposals:

-- Strengthening government oversight of mortgage lenders and brokers and creating nationwide standards for licensing of mortgage brokers across the states.

-- The Federal Reserve should issue stronger consumer protection rules and require improved disclosures on affordability.

-- Request greater disclosure by issuers of mortgage backed security about their "due diligence" and about the quality of the underlying asset.

-- Requiring institutional investors to create their own risk measurements of securitized assets independent of credit ratings agencies.

-- Reforming the credit rating process by encouraging ratings agencies to clearly differentiate ratings for structured products from those for corporate and municipal bonds. Ratings agencies should also be encouraged to disclose what qualitative reviews they perform on originators of assets used to collateralize asset-backed securities and any conflicts of interest.

-- Developing common guidance among bank regulators and the SEC to address risk management weaknesses revealed by recent market turmoil, including testing the robustness of banks' capital cushions.

-- Urging regulators and their financial institutions to build more capital reserves against risky investments. The Basel Committee on Banking supervision should consider increasing capital requirements against the types of assets that have caused recent losses to financial institutions.

-- Requiring financial institutions to make more detailed disclosures of off-balance sheet commitments, such as asset-backed commercial paper conduits and structured investment vehicles.

-- Urging regulators to work closely with the Financial Accounting Standards Board to review accounting issues and make sure that exposure at financial firms is measured "across business lines."

-- Encouraging development of a U.S. market for "covered bonds," which are secured by mortgages. They are popular in Europe and could be an alternative to a mortgage securitization system that some say is flawed.

(Reporting by David Lawder and Patrick Rucker; editing by Gary Crosse)