What's Happening?
The Federal Reserve is considering new mortgage capital requirements under the Basel III plan, which could indirectly affect the Federal Deposit Insurance Corporation's (FDIC) oversight of banks. Vice Chair for Supervision Michelle Bowman highlighted the potential for increased 'risk sensitivity' in capital requirements for mortgage loans. This move aims to address the significant migration of mortgage origination and servicing from banks to nonbanks, a trend that has been costly for banks, consumers, and the overall mortgage system. The proposed changes are part of a broader effort to revitalize bank participation in the mortgage market while maintaining a safe and sound banking system.
Why It's Important?
The proposed changes by the Federal Reserve could have
significant implications for the banking industry and the FDIC's role in insuring deposits. By increasing the risk sensitivity of capital requirements, the Federal Reserve aims to encourage banks to re-engage in mortgage origination and servicing, potentially reversing the trend of migration to nonbanks. This could lead to increased competition and consumer choice in the mortgage market, potentially lowering costs for borrowers. Additionally, the changes could enhance financial stability by ensuring that banks have adequate capital to cover risks associated with mortgage lending.
What's Next?
The Federal Reserve plans to introduce regulatory proposals that would remove the requirement to deduct mortgage servicing assets from regulatory capital while maintaining a 250 percent risk weight. The proposals will also consider using loan-to-value ratios to determine risk weights for residential real estate exposures. These changes are expected to be open for public comment, allowing industry stakeholders to provide feedback. The outcome of these proposals could shape the future of bank participation in the mortgage market and influence the FDIC's assessment of bank health.
