- Key Insight: Federal Reserve Vice Chair for Supervision Michelle Bowman said the Fed is exploring ways to reduce banks’ regulatory costs associated with mortgage lending and servicing.
- Expert Quote: “These potential changes would address legitimate concerns about mortgage market structure while maintaining appropriate prudential safeguards.” — Fed Vice Chair for Supervision Michelle Bowman.
- Forward Look: Bowman said that the central bank will propose two mortgage-related rules in the near future.
Federal Reserve Vice Chair for Supervision Michelle Bowman said Monday that the central bank will soon introduce regulatory proposals aimed at encouraging banks to originate and hold more mortgages.
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Speaking at the American Bankers Association Conference for Community Bankers in Orlando, Bowman said the central bank is considering potential revisions to parts of the
“‘[The] overcalibration of the capital treatment for these activities [have resulted] in requirements that are both disproportionate to risk and that make mortgage activities too costly for banks to engage,” Bowman said. “I see a path forward that incorporates both renewed bank participation in the mortgage market and a safe and sound banking system.”The Fed’s top regulator noted that bank participation in the mortgage market has
One way to reverse this trend, she said, would be to remove the rule that banks must deduct mortgage-servicing assets from regulatory capital while maintaining a 250% risk weight for those assets. The Fed plans to seek comment from the banking industry on what the appropriate risk weight should be.
“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,” she said.
Bowman also said the Fed will publish a proposal to make capital requirements better reflect the actual risk mortgage loans pose to a bank’s balance sheet, including using loan‑to‑value ratios to determine the risk weight for residential real estate exposures instead of applying a uniform risk weight.”This change could better align capital requirements with actual risk, support on-balance-sheet lending by banks, and potentially reverse the trend of migration of mortgage activity to
The Fed official warned there is volatility affiliated with holding mortgage-servicing rights and that it “is not the right choice for every bank,” noting that banks that engage in MSR’s must “have sufficient expertise and resources.”
During her speech Monday, Bowman said a lack of safeguards for nonbanks in the mortgage industry poses risks to consumers and the financial system. She said when a bank servicer fails, regulatory protections are in place to shield consumers and limit fallout, but nonbanks, which dominate the market,
Bowman added that borrowers whose mortgages are serviced by nonbanks often have had more difficulty than their bank-serviced counterparts in times of financial stress, noting that during the COVID pandemic, bank-serviced borrowers “were more likely to receive forbearance on their mortgage payments than those with nonbank servicers.”
Bowman added that having a variety of firms in a critical market like home mortgages makes prudential sense and would also benefit consumers.
“By creating a resilient mortgage market that includes robust participation from all types of financial institutions, we can deliver affordable credit and high-quality servicing to borrowers regardless of economic conditions,” Bowman said. “Strengthening bank participation in these activities does not threaten the safety and soundness of the banking system. These goals are consistent.”