Banks are originating a smaller portion of mortgages than they used to, and the Federal Reserve wants to change that with proposed rule shifts, according to one top regulator.
The Fed wants to make mortgage originations cheaper and more appealing to banks and is considering getting rid of the requirement to deduct mortgage servicing assets from regulatory capital while maintaining the 250% risk weight assigned to these assets, Vice Chair for Supervision Michelle Bowman said Monday at the American Bankers Association conference in Orlando, Florida.
The central bank is also considering boosting the risk sensitivity of capital requirements for mortgage loans on bank books, she said, in part by using loan-to-value ratios to determine risk weight rather than applying a uniform risk weight.
The proposed changes will aim to encourage bank participation in mortgage servicing and would better align capital requirements with actual risk, Bowman said.
The Fed’s upcoming proposals come amid what Bowman called a “concerning” trend.
“In 2008, banks originated around 60% of mortgages and held the servicing rights on about 95% of mortgage balances,” she said. “Since that time, the contraction has been extraordinary. As of 2023, banks originated only 35% of mortgages and serviced about 45% of mortgage balances.”
If regulation – including the over calibration of the capital treatment for mortgage origination – caused this shift, it’s up to regulators to fix it, Bowman said.
Mortgage originations are important to banks because the associated fee income provides banks with stable income, irrespective of the interest rate environment, Bowman noted. But origination services aren’t just important to banks for their revenue, she said, but for the relationship they foster between institution and individual.
“Customers with strong bank connections naturally turn to that bank for other financial needs, from checking accounts to investment services,” Bowman said. “This can create a virtuous circle — good customer service in the mortgage business can lead to a stronger relationship with customers and result in improved bank financial resiliency.”
Mortgage origination could be more valuable to banks than nonbanks, she said, because banks are able to cross-sell more services. From a financial stability perspective, Bowman noted that nonbanks have experienced growth faster than the regulatory and resolution framework that supports them, meaning they’re comparably short on safeguards.
“[Bowman’s] recognition that aspects of the current capital framework have discouraged banks from competing for mortgage origination and servicing activity is an important step forward,” a spokesperson for the Mortgage Bankers Association said in a prepared statement Monday.
“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,” the spokesperson said.
