Mortgage Capital Rules Tighten for US Banks

Basel III Brings Changes

According to Bloomberg, the Federal Reserve is advancing a new bank capital plan. The proposal would impose updated mortgage capital rules on US lenders. Regulators included the changes in the broader Basel III update.

The plan aims to increase risk sensitivity for mortgages held on bank balance sheets. Specifically, it would tie capital requirements to loan-to-value ratios. This approach would replace the current uniform risk-weight framework. As a result, banks would assess mortgage risk with greater precision.

Shifting Risk, Stirring Feedback

Regulators want to align capital requirements more closely with actual mortgage risk. In turn, they hope to encourage banks to keep more loans on their balance sheets. Officials also aim to slow the migration of mortgage activity to nonbank lenders, a dynamic that has already pushed some institutions to explore partnerships with private equity to sustain their commercial real estate lending capacity.

Michelle Bowman, the Fed’s top bank supervisor, said regulators will seek public comment. They want feedback on proposed risk weights for different mortgage types. Ultimately, the Fed aims to support a resilient mortgage market. Leaders want a system that functions well across economic cycles.

Industry Impact Ahead

The proposed mortgage capital requirements build on previous, unfinalized proposals that faced bank industry resistance due to their stringency. Regulators expect to hear from a broad range of stakeholders before the new mortgage capital rules under the Basel III plan are finalized. Bank participation in mortgage lending is targeted for support, aiming to prevent disruptions to credit availability and servicing quality for borrowers.