Bowman outlines plan to address 'significant migration' of mortgage origination away from the banking channel
Federal Reserve vice chair for supervision Michelle Bowman used a speech to community bankers in Orlando to signal that the central bank is prepared to rethink how capital rules treat mortgage lending – and, in the process, try to pull a shrinking share of US home loans back onto bank balance sheets.
Bowman said the data showed “a significant migration of mortgage origination and servicing out of the banking sector” since the financial crisis. In 2008, banks originated around 60% of mortgages and held the servicing rights on about 95% of mortgage balances; by 2023 those shares fell to 35% and 45% respectively, she said.
Capital rules under scrutiny
Bowman tied much of that shift to 2013 changes in the capital treatment of mortgage servicing rights (MSRs), which raised risk weights and forced banks to deduct MSRs above a threshold from regulatory capital.
That “over calibration of the capital treatment for these activities” produced requirements “disproportionate to risk” and made mortgages “too costly for banks to engage,” she said.
She argued that the current framework also mispriced risk in on‑balance‑sheet mortgages by applying the same risk weight regardless of loan‑to‑value ratios, even though “default probability and the severity of losses vary substantially with LTV.”
Low‑LTV loans, she said, carried far lower expected losses, especially as borrowers paid down principal over time.
Two-pronged Basel adjustment
Bowman said forthcoming proposals would “increase bank incentives to engage in mortgage origination and servicing.”
First, the Fed would remove the requirement that banks deduct MSRs from regulatory capital, while initially keeping a 250% risk weight and seeking comment on whether that weight was appropriate.
“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.
Second, regulators would consider tying mortgage risk weights to LTV buckets rather than a flat charge, an approach Bowman said “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.”
Nonbank dominance and stability concerns
A 2024 Financial Stability Oversight Council report found that nonbank mortgage companies originated roughly two‑thirds of US mortgages in 2022 and owned more than half of servicing rights, while highlighting vulnerabilities around liquidity, funding and resolution planning.
Regulators including the FDIC have warned that nonbank servicers now manage a majority of US mortgages and often rely on short‑term wholesale funding, with MSRs that can be volatile and highly dependent on models and subjective judgement.
During the COVID‑19 shock, research showed that bank servicers generally provided more consistent forbearance, reinforcing long‑running policy concerns about consumer outcomes when stress hits the nonbank sector.
What it could mean for lenders and brokers
For community and regional banks, Bowman framed mortgages as both a revenue line and a relationship anchor.
Servicing income, she said, diversified earnings away from pure lending spreads and rewarded banks that could invest in “personnel and technology” to manage the operational and compliance risks.
At the same time, she acknowledged that mortgages would remain a shared space with independent mortgage banks and brokers.
Servicing valuations and capital markets spreads have become a big part of rate dynamics, with executives warning that distorted servicing values and secondary‑market pricing have complicated origination economics even beyond base‑rate moves.
Trade groups have already signaled diverging priorities: bank advocates have pushed for capital relief on MSRs and low‑risk mortgages, while broker groups have warned that any tilt toward large depositories must preserve competition and choice for homebuyers and avoid disadvantaging intermediaries that kept credit flowing when banks pulled back.
Bowman closed by insisting that “strengthening bank participation in these activities does not threaten the safety and soundness of the banking system,” arguing instead that a better‑balanced market – with banks, nonbanks and brokers all active under consistent oversight – would leave borrowers with more resilient access to credit through the cycle.
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