Fed Vice Chair Bowman Calls for Capital Rule Revisions to Boost Bank Mortgage Participation

Federal Reserve Vice Chair for Supervision Michelle W. Bowman has proposed recalibrating regulatory capital rules to incentivize banks to re-engage with the mortgage origination and servicing markets. Speaking at the American Bankers Association Community Bankers Conference, Bowman highlighted a significant decline in bank market share since 2008, attributing the shift to post-crisis regulations that may overstate the risk of mortgage-related assets. This potential policy shift aims to strengthen bank profitability and deepen consumer relationships while addressing the systemic migration of mortgage activity to nonbank lenders.

During her address in Orlando, Vice Chair Bowman detailed the "extraordinary" transformation of the mortgage landscape over the last fifteen years. She noted that in 2008, depository institutions originated approximately 60 percent of mortgages and held servicing rights for 95 percent of mortgage balances. By 2023, those figures plummeted to 35 percent for originations and 45 percent for servicing. Bowman argued that this out-migration to nonbank lenders, driven largely by stringent post-crisis capital requirements, has been costly for the banking sector, consumers, and the overall stability of the mortgage system.

To reverse this trend, Bowman suggested a series of specific regulatory adjustments focused on how mortgage servicing rights (MSRs) and residential mortgage exposures are treated. Key proposals include eliminating the deduction of MSRs from regulatory capital and reassessing the risk weights applied to these assets. Furthermore, she floated the idea of introducing greater risk sensitivity into capital standards by tying requirements more closely to loan-to-value (LTV) ratios and other credit factors. These changes are intended to better align capital mandates with actual risk profiles, thereby supporting on-balance-sheet lending.

Beyond balance sheet mechanics, Bowman emphasized that mortgage lending is a cornerstone of relationship banking, serving as a "virtuous circle" that allows banks to cross-sell products and reinforce financial resilience. She also pointed to the pandemic as evidence of the consumer benefits of bank involvement, noting that borrowers with bank-serviced loans were more likely to receive forbearance than those with nonbank servicers. While any significant overhaul would require coordination with other regulators or legislative action, the Fed’s signals indicate a pivot toward restoring bank participation as a core pillar of the residential mortgage market.