Fed Plans to Ease Bank Capital Rules, Boosting Mortgage Lending
The Federal Reserve is preparing to reduce capital requirements for US banks, aiming to encourage increased mortgage lending to American homebuyers. This move, announced by Fed Vice Chair for Supervision Michelle Bowman, follows promises from the Trump administration to address restrictions perceived as hindering bank participation in the mortgage market.
Shifting Mortgage Landscape: Banks Losing Ground
Banks have steadily lost market share in the US mortgage origination space. In 2008, banks accounted for 60% of home loan origination, but by 2023, that figure had fallen to 35%. A growing portion of mortgage activity is now handled by non-bank financial service companies like Rocket Mortgage and CrossCountry Mortgage.
Bowman attributes this shift to capital rules that make mortgage activities too costly for banks. She believes the current “over-calibration of the capital treatment” disproportionately impacts risk and discourages bank involvement.
Reforms to Incentivize Bank Participation
The Fed plans two key changes to its rules. First, it will remove the requirement for banks to deduct mortgage servicing rights from their regulatory capital. Second, it will review the current 250% risk weighting applied to these assets, potentially reducing it. The Fed will also consider allowing banks to adjust capital allocation based on the loan-to-value ratio of mortgages, a common practice in other countries.
These changes aim to “increase bank incentives to engage in mortgage origination and servicing” and potentially reverse the trend of mortgage activity migrating to non-banks.
Alignment with Treasury Department Goals
The Fed’s plans align with concerns voiced by Treasury Secretary Scott Bessent, who has emphasized the need to eliminate “capital arbitrage” that drives bank lending to non-banks. Bessent indicated potential reductions in capital requirements for large banks on mortgage loans and investment-grade corporate loans.
Impact on Mortgage Servicing Rights
Currently, banks continue to service many mortgages even after selling them to government-sponsored agencies like Fannie Mae and Freddie Mac, earning fees and maintaining customer relationships. The proposed changes specifically address the capital rules governing these mortgage servicing rights, which have been subject to “stringent capital treatment” since 2013.
Future Trends and Implications
Increased Competition in Mortgage Market
Easing capital requirements could lead to increased competition in the mortgage market as banks become more active lenders. This could translate to more favorable terms for borrowers, including lower interest rates and fees.
Potential for Innovation in Mortgage Products
With greater bank involvement, we might see innovation in mortgage products tailored to specific borrower needs. Banks could leverage their existing customer relationships and data analytics to offer more personalized mortgage solutions.
Regulatory Scrutiny and Risk Management
Even as the proposed changes aim to stimulate lending, they will likely be met with scrutiny from those concerned about financial stability. The Fed will need to carefully balance the benefits of increased lending with the need for robust risk management practices.
The Role of Non-Bank Lenders
The future role of non-bank lenders remains uncertain. While banks may regain market share, non-bank lenders are likely to remain significant players, particularly in specialized segments of the mortgage market.
FAQ
Q: What are mortgage servicing rights?
A: These are the rights banks hold to collect payments, manage escrow accounts, and handle other administrative tasks related to mortgages they have sold to investors.
Q: What is loan-to-value (LTV) ratio?
A: Here’s the ratio of the mortgage amount to the appraised value of the property. Lower LTV ratios generally indicate lower risk.
Q: Will these changes affect all borrowers equally?
A: The impact may vary depending on individual circumstances and the specific mortgage products offered by different lenders.
Q: What is Basel capital rules?
A: These are internationally agreed-upon standards for bank capital adequacy, designed to ensure banks have sufficient capital to absorb losses and remain solvent.
Did you know? Michelle Bowman is the first person to fill the community bank seat on the Federal Reserve Board, a position created by a 2015 law.
Pro Tip: Keep an eye on announcements from Fannie Mae and Freddie Mac, as changes in bank lending practices could also influence their policies.
Stay informed about the evolving mortgage landscape. Explore our other articles on financial regulations and homeownership for more insights.
