Federal Reserve Board’s Bowman signals Basel capital proposals to drop mortgage servicing asset deductions and add LTV-based mortgage risk weights

Federal Reserve Board Vice Chair for Supervision Michelle W. Bowman used a speech to outline potential Basel-based capital changes intended to encourage banks to re-engage in mortgage origination and servicing, arguing that current prudential calibration has contributed to a long-run shift of activity to nonbanks. Bowman pointed to a sharp decline in bank market share, with banks originating around 60 percent of mortgages in 2008 versus 35 percent in 2023, and servicing about 95 percent of mortgage balances in 2008 versus about 45 percent in 2023. She linked the shift partly to the 2013 capital treatment of mortgage servicing rights (MSRs), including higher risk weights and a “deduction threshold” that can trigger disproportionately high capital requirements, and argued that uniform risk weights on mortgages held on balance sheet are insufficiently risk-sensitive because they do not reflect loan-to-value (LTV) differences. Two regulatory proposals are expected to be introduced soon that would, among broader capital framework changes, remove the requirement to deduct mortgage servicing assets from regulatory capital while retaining the 250 percent risk weight and seeking comment on the appropriate risk weight, and consider using LTV ratios to set risk weights for residential real estate exposures instead of a single uniform risk weight.