In an effort to encourage lenders to provide more mortgages for American homebuyers, the Federal Reserve is preparing to ease U.S. bank capital requirements, the central bank’s head of regulation announced in a speech.
The move, which Fed Vice-Chair for Supervision Michelle Bowman announced Monday, comes after top officials in President Donald Trump’s administration promised to remove restrictions they blame for pushing lending out of the banking system, the Financial Times reported.
Bowman said the central bank planned two changes to its rules that would “increase bank incentives to engage in mortgage origination and servicing”. The reforms would “potentially reverse the trend of migration of mortgage activity to non-banks over the past 15 years.”
Her announcement is the clearest sign of how the Fed plans to loosen its earlier proposals for implementing the internationally agreed-upon Basel capital rules to make them more favorable to Wall Street lenders, the Financial Times reported.
Banks Lost Significant Share of Mortgage Market
Bowman said that banks have lost a significant portion of their share of the U.S. mortgage market, which has declined from 60 percent of home loan origination in 2008 to 35 percent in 2023.
A growing share of the originating and servicing of U.S. mortgages is conducted by specialist financial service companies, such as Rocket Mortgage and CrossCountry Mortgage, the Financial Times reported.
in her speech, Bowman blamed the shift on “over-calibration of the capital treatment for these activities, resulting in requirements that are both disproportionate to risk and that make mortgage activities too costly for banks to engage”.
Bowman’s comments echo concerns often expressed by Treasury Secretary Scott Bessent, who in October said he was “focused on ensuring that modernization of our capital framework ends the capital arbitrage that drives bank lending to non-banks”.
Bessent said this process was likely to “entail reduced capital requirements for large banks on mortgage loans, investment-grade corporate loans and some other important exposures”.
Nanks sell many of the mortgages they originate to the government-sponsored agencies Fannie Mae and Freddie Mac, but the banks continue to service many of those loans after their sale, earning a stream of fees and maintaining the relationship with the customer.
‘Stringent Capital Treatment’
According to Bowman, the capital rules for mortgage servicing rights that U.S. banks hold on their balance sheets had been subjected to a “stringent capital treatment” under rules introduced in 2013.
She said the central bank would remove the requirement for banks to deduct these assets from their regulatory capital. The Fed also would consult on whether to change its punitive treatment when banks assess their riskiness for capital purposes, in which they are given a 250% risk weighting.
The Fed also would consider changing the requirement for banks to apply a standard capital calculation to mortgages regardless of their riskiness, Bowman noted. The Fed may allow banks to vary the amount of capital they allocate to a mortgage depending on the size of the loan relative to the value of the property — something that is standard practice in many other countries.
“Strengthening bank participation in these activities does not threaten the safety and soundness of the banking system. These goals are consistent,” Bowman said.
