Proposed capital rules set LTV-based mortgage risk weights

"The changes would reduce Tier 1 capital requirements by 4.8% for the largest banks (Categories I and II), 5.2% for Categories III and IV, and 7.8% for smaller institutions. For mortgages, the Basel III and standardized approach proposals aim to boost incentives for origination and servicing by increasing risk sensitivity, including eliminating the capital deduction for certain mortgage servicing assets (MSRs)."

"MSRs would receive a 250% risk weight, with regulators seeking feedback on whether that level is appropriate. This change would help promote bank participation in mortgage businesses, while recognizing uncertainty regarding firms' ability to realize value from mortgage servicing assets over the economic cycle, the Fed Board stated."

"An important benefit of these proposals is that they would reduce incentives for traditional lending activities like mortgage origination, mortgage servicing, and lending to businesses to migrate outside of the regulated banking sector. Together, these changes would strengthen our overall capital framework, which would remain robust under the new regime."

Basel III and standardized approach proposals reduce Tier 1 capital requirements across all bank categories, with reductions ranging from 4.8% for largest banks to 7.8% for smaller institutions. For mortgages, the proposals eliminate capital deductions for mortgage servicing assets (MSRs) and assign them a 250% risk weight instead. Residential real estate exposures receive risk weights based on loan-to-value ratios, ranging from 20% for 50% LTV loans to 105% for 100% LTV loans. These changes aim to strengthen the capital framework, promote bank participation in mortgage businesses, and reduce incentives for traditional lending activities to migrate outside the regulated banking sector. Fed Vice Chair Michelle Bowman led the effort, though Governor Michael Barr opposed the proposals as unnecessary.

Read at www.housingwire.com