US Banks Plan to Ease Capital Requirements to Boost Mortgage Lending
In a recent development, the Federal Reserve, the central bank of the United States, is reportedly gearing up to ease capital requirements for US banks. This strategic move is aimed at encouraging lenders to provide more home loans to the American population, as disclosed by the central bank’s head of regulation. This information came to light in a recent speech by Michelle Bowman, Fed vice-chair for supervision.
Driven by a Shift in Regulatory Policies
The move is seen as a response to promises by top officials in the Trump administration to lift restrictions blamed for pushing lending activities out of the banking system. According to Bowman, the Fed plans two significant changes to its regulatory rules. These changes are expected to increase incentives for banks to engage in mortgage origination and servicing, potentially reversing a 15-year trend of mortgage activities migrating to non-banks.
Impact on Wall Street Lenders
The announcement provides a clear indication of how the central bank plans to make its earlier proposals for implementing the internationally agreed Basel capital rules more favorable to Wall Street lenders. Over the past decade, banks have lost a significant share of the US mortgage market. As Bowman pointed out, the share of home loan origination by banks has dropped from 60% in 2008 to 35% in 2023.
The Rise of Specialist Financial Service Companies
Currently, a growing proportion of US mortgage originations and services are being handled by specialist financial service companies such as Rocket Mortgage and CrossCountry Mortgage. Bowman attributes this shift to the over-calibration of capital treatment for these activities, which she says resulted in disproportionate risk requirements and made mortgage activities too costly for banks.
Aligning with the US Treasury’s Concerns
Bowman’s remarks align with concerns expressed by US Treasury Secretary Scott Bessent. In October, Bessent stated his focus was on ensuring the modernization of the capital framework to end the capital arbitrage that pushes bank lending to non-banks. He indicated this process would likely involve reduced capital requirements for large banks on mortgage loans, investment-grade corporate loans, and some other significant exposures.
Implications for Banks
It’s worth noting that US banks often sell the mortgages they originate to government-sponsored agencies such as Fannie Mae and Freddie Mac. However, these banks continue to service many of these loans after their sale, earning a stream of fees and maintaining customer relationships.
Changes in Capital Rules
Bowman highlighted that the capital rules for mortgage servicing rights that banks hold on their balance sheets have been subject to stringent capital treatment under rules introduced in 2013. She indicated that the Fed planned to eliminate the requirement for banks to deduct these assets from their regulatory capital. Furthermore, the Fed would consult on whether to change their punitive treatment when banks assess their riskiness for capital purposes, in which they are currently given a 250% risk weighting.
Standardizing Capital Calculation for Mortgages
The Fed also plans to reconsider the requirement for banks to apply a standard capital calculation to mortgages, irrespective of their riskiness. There’s a possibility that banks might be allowed to vary the amount of capital they allocate to a mortgage, depending on the size of the loan relative to the property value – a practice that is standard in many other countries.
Boosting Bank Participation
Amid these changes, Bowman reassures that strengthening bank participation in these activities does not pose a threat to the safety and soundness of the banking system. She asserts that these goals are consistent and mutually supportive.
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