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The Federal Reserve is preparing to ease US bank capital requirements in a drive to encourage lenders to provide more mortgages for American homebuyers, according to the central bank’s head of regulation.
The move, which Fed vice-chair for supervision Michelle Bowman announced in a speech on Monday, comes after top officials in Donald Trump’s administration promised to remove restrictions they blame for pushing lending out of the banking system.
Bowman said the Fed planned two changes to its rules that would “increase bank incentives to engage in mortgage origination and servicing”. The reforms would “potentially reverse the trend of migration of mortgage activity to non-banks over the past 15 years”, she said.
The announcement is the clearest sign of how the central bank plans to loosen its earlier proposals for implementing the internationally agreed Basel capital rules to make them more friendly to Wall Street lenders.
Banks have lost a major portion of their share of the US mortgage market, which has fallen from 60 per cent of home loan origination in 2008 to 35 per cent in 2023, Bowman said.
A growing share of the originating and servicing of US mortgages is being conducted by specialist financial service companies, such as Rocket Mortgage and CrossCountry Mortgage.
Bowman blamed this shift on “over-calibration of the capital treatment for these activities, resulting in requirements that are both disproportionate to risk and that make mortgage activities too costly for banks to engage”.
Her comments echo concerns often expressed by US Treasury secretary Scott Bessent, who in October said he was “focused on ensuring that modernisation of our capital framework ends the capital arbitrage that drives bank lending to non-banks”.
Bessent said this process was likely to “entail reduced capital requirements for large banks on mortgage loans, investment-grade corporate loans and some other important exposures”.
US banks sell many of the mortgages they originate to the government-sponsored agencies Fannie Mae and Freddie Mac. But the banks continue to service many of these loans after their sale, earning a stream of fees and maintaining the relationship with the customer.
Bowman said the capital rules for mortgage servicing rights that banks hold on their balance sheets had been subjected to a “stringent capital treatment” under rules introduced in 2013.
She said the Fed would remove the requirement for banks to deduct these assets from their regulatory capital. It would also consult on whether to change their punitive treatment when banks assess their riskiness for capital purposes, in which they are given a 250 per cent risk weighting.
The Fed would also consider changing the requirement for banks to apply a standard capital calculation to mortgages regardless of their riskiness, she said. It may allow banks to vary the amount of capital they allocate to a mortgage depending on the size of the loan relative to the value of the property — something that is standard practice in many other countries.
Bowman said: “Strengthening bank participation in these activities does not threaten the safety and soundness of the banking system. These goals are consistent.”
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