On February 16, the Fed’s Vice Chair for Supervision Michelle Bowman discussed proposed changes to the Basel capital framework aimed at encouraging banks to re-engage in mortgage origination and servicing. She noted that banks originated around 60% of mortgages and held servicing rights for 95% of mortgage balances in 2008, compared to originating 35% of mortgages and holding just 45% of mortgage servicing rights in 2023. Bowman contended that the decline has been costly for banks, consumers, and the overall mortgage system, and that it was partly driven by the 2013 changes in capital treatment for mortgage servicing rights that she argued increased capital requirements beyond actual risk by applying the same risk weight regardless of loan-to-value (LTV) ratio.
In her remarks, the vice chair highlighted two proposals: (i) removing the requirement to deduct mortgage servicing assets from regulatory capital while retaining the 250 percent risk weight assigned to them, with a review of whether that risk weight should change; and (ii) introducing greater risk sensitivity for mortgages held in bank portfolios by tying risk weights to LTV ratios rather than applying a uniform standard. Vice Chair Bowman asserted such changes could better align capital requirements with underlying risk, support on-balance-sheet lending, and potentially reverse the migration of mortgage activity to nonbanks over the past 15 years. Bowman encouraged industry feedback on these proposed modifications.
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