As part of their efforts to make homes more affordable, the Trump administration and the Fed said they want banks to get back into the mortgage business, but Politico reported that banks aren’t likely to go along.
According to Politico, regulators hope that nudging mortgage origination back to banks and away from less-regulated lenders will unlock more loans for homebuyers, give federal agencies more insight into risks percolating in the housing market, and boost revenue for regulated financial institutions.
In the wake of the 2008 financial crisis, Politico said that the federal government imposed rules making banks hold more capital on their balance sheets to withstand another housing meltdown. But, those rules increased the cost of mortgage lending for banks, pushing many to scale back the business.
Under President Donald Trump, however, regulators are rolling back some of those rules to make lending more attractive to banks.
“Regulation by reflex has driven excessive regulation,” Treasury Secretary Scott Bessent said in February. “That can lead to economic stagnation.”
No Rush to Come Back
For their part, however, banks aren’t likely to rush back into the mortgage business, Politico said, citing analysts.
According to the Politico report, many banks see mortgage lending as a less profitable line of business, one that could haunt their reputations and incur huge legal costs should the housing market collapse as it did during the 2008 global financial crisis.
Morgan Stanley analysts said in a research note that “large penalties post-2008, a focus on relationship banking with core customers, and higher cost structures [compared with] digital-first nonbank models” was a major contributor to banks backing away from mortgage lending.
That means the benefits of the administration’s broader bank deregulation likely won’t pass through to the housing market, as the administration gears up for a challenging midterm campaign in which affordability concerns, particularly in housing, are at the top of many voters’ minds.
“Don’t expect an aggressive pivot by banks,” Morgan Stanley’s analysts wrote.
Before the crisis of 2008, banks issued most of the country’s mortgage loans, but tighter regulations and the political fallout of the housing collapse in the aftermath sent them heading for the door, yielding their dominance in the mortgage market to such lenders as United Wholesale Mortgage and Rocket Mortgage.
Now, those types of lenders issue roughly two-thirds of all home loans, according to data from the Financial Stability Oversight Council, an interagency panel of regulators, Politico said.
Capital Reserves
Last month, the Fed and other regulatory agencies announced plans to lower the amount of capital that banks will need to hold against the mortgages on their balance sheet and allow banks to hold more mortgage servicing assets — all to make it less expensive for banks to lend to homebuyers.
Politico noted that proposal estimates that the mortgage provisions along with other changes to bank capital rules could unlock $643 billion more in lending capacity, which, if lent to the real estate market, could push down loan prices.
Regulators do not expect the changes to be a panacea, though.
Bank capital “represents only a small part of the broader mortgage problem,” Federal Reserve Vice Chair for Supervision Michelle Bowman said. She initially raised the proposed changes.
“Comprehensively addressing mortgage market challenges would also require revisiting Consumer Financial Protection Bureau rules and legislative requirements,” Bowman said.
Bob Broeksmit, President of the Mortgage Bankers Association, said he thinks the proposals will have limited effect on mortgage lending.
“I don’t expect that there’s going to be a sea change in who does mortgages,” he said. Broeksmit and the MBA still praised the changes, calling the previous requirements overly burdensome.
Changing Incentives
An official at a larger bank, granted anonymity to discuss matters freely, told Politico that banks are unlikely to reenter a space they have already exited unless the incentives meaningfully change.
The changes from this package, while helpful, do not make that much of a dent, the official said.
Politico reported that Bank of America, JPMorgan Chase, Citi and Wells Fargo declined to comment on their mortgage origination plans and their thoughts on the recent capital changes. The Federal Reserve declined to comment.
“The Trump Administration will never stop working to streamline regulations and expand housing affordability for all Americans,” White House spokesperson Davis Ingle said.
