The Federal Reserve has signaled it may loosen key rules to lure banks back into the mortgage market after years of retreat.
Speaking at an American Bankers Association conference in Orlando on Monday, Michelle Bowman, a member of the Fed’s Board of Governors and vice chair for supervision, warned that mortgage lending and servicing have migrated sharply to nonbank firms since the financial crisis.
Bowman’s talk came as congressional Republicans heightened calls for reforms to the Dodd-Frank Act.
They’ve blamed the constraints from that post-Great Recession bill for chasing banks away from housing. And, they’ve raised the prospect of ending the 18-year-long conservatorship of Fannie Mae and Freddie Mac.
Two regulatory proposals are coming to encourage more banks to participate in mortgage origination and servicing, she said. Together, they’d “address legitimate concerns about mortgage market structure while maintaining appropriate prudential safeguards.”
One would remove the requirement to deduct mortgage servicing assets from regulatory capital. But the Fed would maintain the 250% risk weight assigned to these assets. The other proposal could boost the risk sensitivity of capital requirements for mortgage loans on bank books.
“We will seek comment on the appropriate risk weight for these assets,” Bowman said. “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.”
Rebalancing act
Banks originated about 60% of mortgages and held servicing rights to about 95% of mortgage balances in 2008, according to data from the Financial Stability Oversight Council. By 2023, banks originated just 35% of mortgages and serviced about 45% of balances.
But banks need to invest in mortgages, Bowman said. It’s good for both sides: Customers come back for other financial needs, and mortgage servicing provides fee income that diversifies a bank’s revenue stream, so it doesn’t rely on other lending instead.
Bowman said the 2013 change in capital treatment of mortgage servicing rights is partly to blame for the decline in the bank share of the mortgage world. She also said it might make sense to revise some Consumer Financial Protection Bureau rules.
Regulations around capital treatment, after all, are “only a small part of the broader mortgage problem,” Bowman said.
“By requiring disproportionately high capital, we reduce a bank’s ability to deploy capital to support the needs of their community. In light of these considerations, I am open to revisiting whether the capital treatment of MSRs and mortgages is appropriately calibrated and is commensurate with the risks.”