The Federal Reserve will soon propose two mortgage-related regulatory rules designed to stabilize banks’ role in the mortgage market, Fed Vice Chair for Supervision Michelle Bowman announced in a speech Monday morning at the American Bankers Association’s Conference for Community Bankers.
Bowman cited “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 said.
According to Bowman, the proposals would increase bank incentives to engage in mortgage origination and servicing. One 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 would seek 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.
The Fed will also consider making mortgage capital rules more “risk‑sensitive,” she said. One potential approach 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 proposed.
Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA), praised Bowman’s openness to revisit mortgage regulations for banks in a statement shared with Scotsman Guide.
“For years, MBA has advocated for regulatory reforms that better align capital requirements with the actual risk profile of mortgage lending and servicing,” Broeksmit stated. He added that Bowman’s recognition that aspects of the current capital framework have discouraged banks from competing for mortgage origination and servicing is an important step forward.
“A more appropriately calibrated approach, particularly with respect to mortgage servicing rights and mortgage loans, will strengthen banks’ ability to serve creditworthy borrowers while maintaining safety and soundness,” Broeksmit said.
Kimber White, president of the National Association of Mortgage Brokers, commented that while he supports reviewing mortgage rules, “changes should boost competition and choice for homebuyers, not just benefit large banks.”
“When banks pulled back, brokers maintained access to credit, improved rate shopping, and served many first-time and underserved buyers,” White said in a statement shared with Scotsman Guide. “Policymakers should recognize brokers’ role in keeping mortgage costs competitive and loans accessible, as our industry has seen an increased market share despite challenges to the marketplace.”
White added that changes to capital rules should “ensure a level playing field,” and that “adjusting regulations without addressing broader oversight differences could reduce competition, raise costs and limit options.”
