Bowman calls for greater bank involvement in mortgage industry

Banks should play a more prominent role in the mortgage industry, said Federal Reserve Vice Chair for Supervision Michelle Bowman on Feb. 16 during the American Bankers Association Community Banking Conference. .Bowman said the Federal Reserve will soon propose two mortgage regulatory rules. One would remove the mandate to deduct mortgage servicing assets from regulatory capital while keeping the 250 percent risk weight on those assets, Bowman said. Another would raise the risk sensitivity of capital requirements for mortgage loans on bank books. “One approach would be to use loan-to-value ratios to determine the applicable risk weight for residential real estate exposures, rather than applying a uniform risk weight regardless of long-term value,” she added. “This change could better align capital requirements with actual risk, support on-balance-sheet lending by banks, and potentially reverse the trend of migration of mortgage activity to nonbanks.” Bowman described the large shift in mortgage origination and servicing from banking. While in 2008 banks originated 60 percent of mortgages and held the servicing rights on the vast majority of mortgage balances, today they only originate 35 percent of mortgages and service less than half of mortgage balances. Bowman said fewer banks originating and servicing mortgages has led to a reduction in consumer choice and competition. Borrowers with bank services were more likely to get forbearance on their mortgage payments during the pandemic than those serviced by nonbanks, she added. The migration of mortgage services is partially caused by over-monitoring bank capital treatment, Bowman said, resulting in requirements too burdensome for bank risk profiles and making mortgages too costly for banks to participate. She cited 2013 rules from the Consumer Financial Protection Bureau that enforced strict loss mitigation standards and mandated intervening early with delinquent borrowers. Regulatory and resolution frameworks for nonbank mortgage companies have not kept pace with their growth, Bowman said. She contrasted that with traditional banks, where regulators have options to ensure core servicing functions remain even when a large bank servicer fails. “To understand the magnitude of this change, as regulators, we have a responsibility to determine whether prudential regulations have driven this shift,” Bowman said. “We should also consider whether the regulations are appropriately calibrated to the risk that mortgage origination and servicing pose to the banking system.