The Federal Reserve will soon issue proposals to change the regulatory capital framework in ways that incentivize banks to originate and service mortgages, Vice Chair for Supervision Michelle Bowman said at ABA’s Conference for Community Bankers in Orlando today.
Specifically, the proposals would “remove the requirement to deduct mortgage servicing assets from regulatory capital while maintaining the 250% risk weight assigned to these assets,” Bowman said. They would also consider increasing the risk sensitivity of mortgage loans held by banks — that is, creating a broader range of risk weights that would reflect the relative characteristics of different loans, “rather than applying a uniform risk weight regardless of [loan-to-value ratio],” she explained.
Bowman’s speech came in light of a long-term erosion of banks’ role in the mortgage market that she said “has been costly for banks, consumers and the overall mortgage system.” She attributed the decline in part to “over-calibration of the capital treatment” for mortgage servicing rights, particularly the Basel III-related unfavorable change in the capital treatment of mortgage servicing rights in 2013. While she acknowledged that MSR valuations can be volatile and that servicing poses its own “substantial” operational risks, she said the capital rules impose the same risk weight regardless of LTV ratio.
“Banks hold substantial numbers of mortgages with low loan-to-value ratios,” she said. “By requiring disproportionately high capital, we reduce a bank’s ability to deploy capital to support the needs of their community.”
In a conversation with ABA President and CEO Rob Nichols following her speech, Bowman also discussed her efforts to improve the supervisory framework at the Fed to enhance flexibility and tailoring. “We’re looking at tying all regulatory thresholds to nominal GDP,” she added — an approach ABA has advocated to ensure regulations apply to the institutions they are designed to.
