Fed Vice Chair Proposes Capital Rule Changes to Boost Mortgage Lending
Federal Reserve Vice Chair for Supervision Michelle Bowman proposed regulatory measures to reverse the migration of mortgage activity away from banks.
In remarks before the American Bankers Association, Ms. Bowman addressed what she called a "concerning trend" of mortgage origination and servicing migrating out of the banking sector. She highlighted the magnitude of the contraction, noting that bank mortgage origination declined from 60 percent in 2008 to 35 percent in 2023, while banks’ share of mortgage servicing rights fell from 95 percent to 45 percent. She argued that this migration has been "costly for banks, consumers, and the overall mortgage system."
Ms. Bowman highlighted the financial stability risks posed by nonbank servicers, arguing that their regulatory frameworks "have not kept pace with their growth." She pointed to changes in the capital treatment of mortgage servicing rights as a key factor driving banks away, particularly the "deduction threshold," which can generate disproportionate capital requirements.
To address these concerns, she described two upcoming regulatory proposals: (i) eliminating the requirement to deduct mortgage servicing assets from regulatory capital while retaining a "250 percent risk weight," and (ii) increasing risk sensitivity by basing risk weights on loan-to-value ratios rather than applying a uniform standard. She said that strengthening bank participation in these activities does not threaten the banking system and would help return banks to a more central role in providing core mortgage services.