A letter sent Friday to the nation’s top banking regulators and jointly signed by eight financial trade associations highlights key concerns of mortgage industry stakeholders as the Trump administration attempts to rebalance the scales of residential lending.
Endorsed by the Mortgage Bankers Association (MBA), Housing Policy Council (HPC) and Independent Community Bankers Association (ICBA), among others, the letter emphasizes a need to ease capital requirements on banks for originating, owning and servicing mortgage-related assets to increase competition and expand access to mortgage credit.
Among current rules that the groups said “negatively impact bank participation” in mortgage lending are excessive risk weights for single-family mortgages held on balance sheets and “punitive capital treatment” of servicing assets, warehouse lending, private mortgage insurance, securitization and credit risk transfer.
“Adequate capital reduces the likelihood of bank failures that threaten broader financial stability, which can prove costly for households, financial institutions, and taxpayers,” read the letter. “However, excessive capital requirements that are misaligned with empirically derived risk assessments can negatively affect the cost of and access to credit.”
The Federal Reserve Board, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency to whom the letter was addressed comprise the prudential banking regulators tasked with regulating the banking sectors’ safety and soundness.
Michelle Bowman, vice chair for supervision and a governor at the Federal Reserve, said last week that the U.S. central bank would soon propose two mortgage-related regulatory rules designed to stabilize an industry that banks fled following the 2008 financial crisis.
“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,” said Bowman during an event last week hosted by the American Bankers Association (ABA), a group that also signed Friday’s letter.
Shifting market share
Growing concentration of the residential mortgage lending and servicing industries within nonbank financial institutions like independent mortgage banks is no new phenomenon.
The economics of originating, owning and servicing home loans for typical consumers has dramatically favored nonbanks over traditional depositories since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which raised the required capital levels for banks to hold against mortgage assets.
MBA data included with the letter shows that the volume of single-family residential mortgages serviced by banks fell from roughly 91% between 2008 and 2011 to 80% in 2013 after an initial phase of new bank capital requirements was implemented. That share continued steadily declining over the next decade to land at about 39% in 2025 — over which time servicing volumes of nonbanks rose from 20% in 2013 to 60% last year.
As they lost their take-out and cross-sale opportunities in servicing, however, many banks shed origination capacity, prompting a similar trend in who wrote new home loans.
Nondepository institutions originated less than one-third of single-family mortgages from 2008 to 2013, MBA data shows, a share that rose to more than half of all new mortgages each year between 2016 and 2019, and more than two-thirds market share in 2024.
“The result is reduced competition and demand for mortgage servicing assets and constrained market liquidity, which affects not just banks but also independent mortgage banks (IMBs), credit unions, and their borrowers,” the letter reads.
Easing capital requirements
To help rebalance the market, the trade groups call for reducing the capital treatment for mortgage servicing rights from 250% to 100%, while recommending that regulators increase or remove altogether existing caps on the extent to which MSRs count toward core capital. Smaller banks that opt into the community bank leverage ratio framework should be exempt from caps, they say.
The groups also called for reducing by half the risk weight assigned to warehouse credit lines extended to IMBs for funding loans before they close.
“Current capital rules impose a 100% risk weight for a warehouse line, which is twice the risk weight of the single-family mortgage collateral that secures the line,” the letter indicated. “We recommend reducing warehouse line risk weights to 50%, which would better align with the risk weights of the collateral securing them.”
These changes are made feasible, the groups argue, on account of stronger underwriting standards born of Dodd-Frank reforms that have made mortgage collateral across the board less risky for banks to hold, further underscoring the distortion of the current capital requirements.
The letter goes further to generally recommend more tailored risk weighting for mortgage credit risk exposure across the board, acknowledging potential impacts on first-time and low- to moderate-income borrower cohorts typically regarded as higher credit risk.
“Moving to a more granular treatment of mortgage credit risk exposures,” they write, “may come with the unfortunate but inherent side effect of increasing capital charges for mortgages made to first-time and other low-wealth borrowers with higher [loan-to-value ratios] at origination, thereby discouraging banks from serving these customers.”
The letter was signed by the Consumer Bankers Association, Mid-Sized Bank Coalition of America, U.S. Chamber of Commerce and U.S. Mortgage Insurers, alongside the aforementioned MBA, HPC, ICBA and ABA.
