Bank Regulators Unveil Capital Reforms To Boost Mortgage Lending

Federal bank regulators on Thursday introduced proposals to overhaul capital rules, affecting how depositories treat mortgage assets.

The package includes three measures: revisions to the Basel III framework for large, internationally active banks; changes to the Global Systemically Important Bank (GSIB) surcharge; and updates to the U.S. standardized approach. A broader Basel III proposal introduced in 2023 was later abandoned.

The Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and Office of the Comptroller of the Currency (OCC) are jointly advancing the proposals.

Overall, 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). Instead, 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.  

The proposal would also assign risk weights to residential real estate exposures based on loan-to-value (LTV) ratios. Risk weights would range from 20% for loans with a 50% LTV and up to 105% for those at 100% LTV but not dependent on real estate cash flows.

“Together, these changes would strengthen our overall capital framework, which would remain robust under the new regime,” said Michelle Bowman, the Fed’s vice chair for supervision, who led the effort. “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.” 

Not all policymakers agreed. Fed Governor Michael S. Barr voted against the proposals, calling the capital reductions “unnecessary and unwise.” Governors Stephen Miran and Christopher Waller supported the changes, with Waller saying they would improve risk sensitivity without unduly increasing requirements.

Industry groups broadly welcomed the move. Mortgage Bankers Association (MBA) president and CEO Bob Broeksmit said the Basel III proposal “incorporates several priorities long advocated,” including more risk-sensitive capital treatment and less punitive rules for MSRs and commercial real estate.

“MBA will review the proposal closely and looks forward to engaging in the formal comment process, including on key technical elements such as the appropriate capital treatment of mortgage servicing assets and the broader application of these reforms across the banking system,” Broeksmit said. 

A coalition of five trade groups — the Consumer Bankers Association, Bank Policy Institute, American Bankers Association, Financial Services Forum and National Bankers Association — also praised the proposal, calling it “an important step forward” that could support lending while maintaining resilience. 

“Today’s proposal marks an important step forward,” the group said in a statement. “We welcome regulators’ efforts to enable banks of all sizes to make more loans to American businesses and households, fueling economic growth while maintaining resilience in the banking system.”

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