Regulators urged to ease bank capital rules for mortgages

"The groups said the existing framework was designed after the financial crisis to strengthen bank resilience. But they argue the mortgage market has changed significantly since then. Reforms such as the Ability-to-Repay and Qualified Mortgage rules now limit risky features like negative amortization, option ARMs, interest-only loans and no-documentation mortgages. Bank participation in mortgages has fallen during that period. Banks accounted for roughly 60% of mortgage originations and 95% of MSR ownership in 2008. By 2023, these shares had declined to about 35% and 45%, respectively."

"The issue gained renewed attention this week after Fed Vice Chair Michelle Bowman anticipated regulators will consider recalibrations to how residential mortgages and MSRs are treated under capital rules. A broader Basel III proposal floated in 2023 was later abandoned. The trade groups' letter was addressed to Bowman, Comptroller of the Currency Jonathan Gould and FDIC Chair Travis Hill. At the center of the request is how much capital banks must hold against mortgages."

Regulatory capital rules for mortgages, MSRs and warehouse lending are being questioned as the mortgage market has changed since post-crisis reforms. Ability-to-Repay and Qualified Mortgage rules removed many risky product features and bank market share in originations and MSR ownership has fallen substantially since 2008. Trade groups asked regulators to recalibrate capital treatment to better reflect credit performance and protections such as loan-to-value considerations and private mortgage insurance. The groups proposed cutting the MSR capital charge from 250% to 100%, loosening caps on MSR inclusion in core capital, exempting certain community banks, and halving capital requirements on warehouse lines.

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