Central bank announces next steps of plan to address migration of banks away from mortgage sector
The Federal Reserve is pushing ahead with plans to ease capital requirements for US banking giants, stripping back measures it says have pushed mortgage activity out of the banking system and into nonbanks.
The central bank’s vice chair for supervision Michelle Bowman, who first announced those proposals in mid-February, indicated in a Washington speech on Thursday that regulators would unveil the full changes next week.
Those tweaks would essentially overhaul how risk-based capital is calculated for large banks and move to a single standardized framework, replacing the current approach.
Mortgage capital requirements would explicitly recognize loan-to-value (LTV) ratios, Bowman said: higher-quality, lower-LTV loans should attract lower capital charges, while riskier, high-LTV loans would carry more capital.
Under the new standardized approach and Basel III proposals, banks wouldn’t be required to deduct mortgage servicing assets (MSAs) from regulatory capital, with MSAs instead receiving a 250% risk weight. The Fed is currently seeking public feedback on whether that weighting is appropriate.
That move, Bowman said, should “reduce disincentives for participating in mortgage markets and servicing their mortgage originations, thereby addressing the mortgage activity migration to nonbanks over the past 15 years.”
She also mentioned earlier proposed changes to the community bank leverage ratio (CBLR), and noted that a more flexible leverage framework could make it easier for those smaller lenders to grow their loan books – especially in lower-risk, relationship-based mortgage products – without tripping leverage constraints.
When first revealing the Fed’s plans in February, Bowman appeared to suggest that the migration of mortgage originations away from the banking space had been detrimental to the market as a whole.
And on Thursday, she said the reforms implemented in the wake of the 2007-08 mortgage meltdown to increase bank capital and boost the financial sector’s resilience had been excessive.
“While these initial reforms were necessary, experience shows requirements that overly calibrate low-risk activities produce unintended consequences,” she said. “It constrains credit availability, pushes activity into the less-regulated nonbank sector, and layers on complexity and costs without meaningfully enhancing safety and soundness.”
The proposals have sparked speculation about what greater bank involvement in the mortgage space could mean for the broker channel and other lenders.
But the mortgage industry doesn’t appear convinced the move would have a significant negative impact on the broker space.
Melissa Cohn, regional vice president at William Raveis Mortgage, told Mortgage Professional America borrowers would continue to shop for the best rate, irrespective of whether it came from a bank or nonbank lender.
And Sonoran Lending’s Jay Lessard highlighted possible benefits for brokers in the short run, including the prospect of banks choosing to partner with the broker channel as they eye up a return to more aggressive mortgage lending.
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