In a letter to leaders of the Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp., a group of eight major housing and banking associations has urged the regulators to ease mortgage-related capital requirements, calling on them to recalibrate bank capital requirements.
The associations argue that current rules discourage bank participation in mortgage markets and harm housing affordability. They stated that reforms could restore bank participation in lending, servicing, and securitization, and would strengthen housing affordability.
The letter comes after the central bank’s head of regulation announced in a speech earlier this month that the Fed is preparing to ease U.S. bank capital requirements in an effort to encourage lenders to provide more mortgages for American homebuyers.
The move, which Fed Vice-Chair for Supervision Michelle Bowman announced, 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.”
“On behalf of the undersigned associations, we write to express our support for the continued work to reexamine and repropose a revised Basel III Endgame rule. The renewed effort provides an opportunity to improve mortgage market stability and housing affordability, while encouraging greater bank participation in the mortgage market,” the letter said.
The letter noted the impact of current rules.
Basel III Endgame Rule
“Current rules that negatively impact bank participation include excessive risk weights for single-family residential mortgages held on balance sheets, as well as punitive capital treatment of mortgage servicing assets, warehouse lending, private mortgage insurance, securitization, and credit risk transfer,” the letter states.
In the letter the groups said they support ongoing efforts to revise the Basel III Endgame rule, framing the regulatory overhaul as an chance to improve mortgage market stability, while encouraging greater bank involvement in home lending.
The coalition includes the Mortgage Bankers Association (MBA), American Bankers Association (ABA), Housing Policy Council (HPC), and U.S. Mortgage Insurers (USMI). They argue that current capital rules have pushed banks out of mortgage origination, servicing, and securitization activities.
The letter is accompanied by data that shows bank servicing share has plummeted from 88% in 2013 to just 39% by 2024, following implementation of the first phase of Basel III capital standards.
The groups recommend several specific reforms.
They include adopting more granular risk weights based on loan-to-value ratios with appropriate credit for private mortgage insurance, removing or significantly raising the current 25% cap on mortgage servicing rights that can be included in regulatory capital, and reducing the 250% risk weight on MSRs to 100%.
According to the letter, the coalition calls for lowering risk weights on warehouse lines of credit, which provide interim financing for two-thirds of all single-family mortgage originations, from 100% to 50%. They argue that the current treatment is misaligned with the actual low-risk profile of these highly collateralized exposures.
The letter emphasizes that significant post-financial-crisis reforms have made the mortgage market healthier and more resilient, warranting recalibrated bank capital rules that reflect current market conditions rather than pre-crisis weaknesses.
The post Housing, Banking Groups Ask Federal Regulators to Ease Mortgage Capital Rules first appeared on The MortgagePoint.
