Federal Reserve Vice Chair for Supervision Michelle Bowman proposed a “new path forward” for regulating the financial marketplace while speaking at a recent industry event and drew strong praise from mortgage banking providers.
Speaking at the American Bankers Association Community Bankers Conference in Orlando on Feb. 16, Bowman reflected on factors that could have led to a “significant migration of mortgage origination and servicing out of the banking sector” over the past 18 years.
In 2008, approximately 60 percent of banks performed mortgage originations and held servicing rights. In 2023, banks originated only about 35 percent of mortgages and serviced about 45 percent of mortgage balances, she noted.
The migration may be due, in large part, to regulatory shifts, including the “over calibration of the capital treatment” of mortgage origination and servicing activities, Bowman explained.
She touted the benefits she believes banks offer over nonbank service providers in the mortgage space in terms of customer service, safety and soundness and risk management functions, as justifications for initiating “a path forward that incorporates both renewed bank participation in the mortgage market and a safe and sound banking system.”
Bowman referenced two soon-to-be-introduced regulatory proposals aimed at increasing bank incentives to engage in mortgage origination and servicing while also making broader changes to the U.S. regulatory capital framework:
“First, the proposals would remove the requirement to deduct mortgage servicing assets from regulatory capital while maintaining the 250 percent risk weight assigned to these assets,” she told conference attendees. “We will seek comment on the appropriate risk weight for these assets. 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.
“Second, the proposals would also consider increasing the risk sensitivity of capital requirements for mortgage loans on bank books,” Bowman added. “One approach would be to use loan-to-value ratios to determine the applicable risk weight for residential real estate exposures, rather than applying a uniform risk weight regardless of LTV. 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 nonbanks over the past 15 years.”
Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit issued a statement welcoming Bowman’s proposal, noting that MBA has spent years advocating for “regulatory reforms that better align capital requirements with the actual risk profile of mortgage lending and servicing.”
“Her recognition that aspects of the current capital framework have discouraged banks from competing for mortgage origination and servicing activity is an important step forward,” Broeksmit said. “A more appropriately calibrated approach, particularly with respect to mortgage servicing rights and mortgage loans, will strengthen banks’ ability to serve creditworthy borrowers while maintaining safety and soundness.”