ORLANDO, Fla.–The Federal Reserve will soon propose two mortgage-related regulatory rules it said are designed to stabilize banks’ role in the mortgage market, according to Fed Vice Chair for Supervision Michelle Bowman.
In remarks to the American Bankers Association’s Conference for Community Bankers, Bowman pointed to what she said has been “a significant migration of mortgage origination and servicing out of the banking sector” to nonbanks. In 2008, banks originated about 60% of mortgages and serviced nearly all of the balances, she noted, but by 2023,those shares fell to 35% and 45%, respectively.
“Taking a step back to understand the magnitude of this change, as regulators, we have a responsibility to determine whether prudential regulations have driven this shift,” Bowman told the meeting.
Change Number One
According to Bowman, the Fed’s proposals would increase bank incentives to engage in mortgage origination and servicing. One of the proposed measure calls for the removal of the current requirement for banks to deduct mortgage servicing assets from regulatory capital while maintaining a 250% risk weight assigned to these assets. She said the Fed will be seeking comment on the appropriate risk weight to apply.
“This change in the treatment of mortgage servicing assets would encourage bank participation in the mortgage servicing business while recognizing uncertainty regarding the value of these assets over the economic cycle,” Bowman said.
Change Number Two
A second change by the Fed will include considering making mortgage capital rules more “risk‑sensitive,” Bowman stated. Among the potential approaches to accomplishing that goal would be to use loan-to-value ratios to determine the risk weight for residential real estate exposures, rather than applying a uniform risk weight regardless of LTV.
“This change could better align capital requirements with actual risk, support on-balance-sheet lending by banks, and potentially reverse the trend of migration of mortgage activity to nonbanks over the past 15 years,” Bowman told the bankers’ group.
