New Fed proposals could reshape mortgage capital requirements

"The near-term impact on the mortgage market is likely to be somewhat limited, Keefe, Bruyette & Woods (KBW) analysts wrote in a report published Tuesday. There are few large banks limiting their participation specifically due to the capital treatment of mortgages or MSRs. Bowman, speaking at the American Bankers Association (ABA)'s 2026 Conference for Community Bankers on Monday, said the Fed will propose recalibrating the capital treatment of mortgage servicing rights (MSRs) and increasing risk-weight sensitivity for residential mortgages held on bank balance sheets."

"Banks currently apply a 250% risk weight to MSRs, while mortgages held on balance sheets generally receive a standard 50% risk weight. While regulators intended these requirements to limit excessive bank concentration in volatile, high-risk and less-liquid MSRs, they also contributed to reduced bank participation in the space. Bank shares of mortgage originations and MSR ownership fell from roughly 60% and 95%, respectively, in 2008 to about 35% and 45% by 2023."

The Federal Reserve plans to propose recalibrating the capital treatment of mortgage servicing rights (MSRs) and increasing risk-weight sensitivity for residential mortgages held on bank balance sheets. Banks currently apply a 250% risk weight to MSRs while mortgages on balance sheets generally receive a 50% risk weight. Those requirements aimed to limit excessive concentration in volatile, high-risk and less-liquid MSRs but also coincided with reduced bank participation. Bank shares of mortgage originations and MSR ownership declined from roughly 60% and 95% in 2008 to about 35% and 45% by 2023. The decline reflects diminished mortgage banking profitability and competition from nonbank servicers with technological advantages, which has compressed returns and influenced long-term MBS supply.

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