Full Breakdown
Federal Reserve Proposes New Mortgage Capital Requirements for U.S. Banks
2/17/2026, 10:57:58 AM
Overview of Proposed Changes
The Federal Reserve is preparing to unveil a significant proposal regarding bank capital requirements, particularly focusing on mortgage loans, as part of the Basel III framework. Michelle Bowman, the Fed's Vice Chair for Supervision, indicated that the new regulations aim to enhance the "risk sensitivity" of capital requirements for residential mortgages. One potential change involves using loan-to-value (LTV) ratios to determine risk weights for these loans, moving away from a uniform risk weight approach. This shift is intended to better align capital requirements with actual risks and could help reverse the trend of mortgage activity migrating to non-bank lenders over the past 15 years.
Historical Context and Current Landscape
Since the 2008 financial crisis, the mortgage market has undergone significant changes, with non-bank lenders increasingly dominating the sector. In 2008, banks originated approximately 60% of mortgages and held 95% of servicing rights. By 2023, these figures had dropped to 35% and 45%, respectively. Bowman attributes this shift to post-crisis regulatory changes, particularly capital requirements that may not accurately reflect the risks associated with mortgage-related assets.
Key Proposals Under Consideration
Bowman outlined two main proposals within the Basel capital framework:
1. Elimination of Mortgage Servicing Asset Deductions: This would remove the requirement for banks to deduct mortgage servicing assets from their regulatory capital while maintaining a 250% risk weight.
2. Increased Risk Sensitivity: The second proposal would introduce greater risk sensitivity for residential mortgage exposures by potentially tying capital requirements to LTV ratios.
Bowman emphasized that these changes could address concerns about the mortgage market structure while ensuring appropriate prudential safeguards.
Industry Response and Implications
The Mortgage Bankers Association (MBA) has expressed support for Bowman's proposals. President and CEO Bob Broeksmit highlighted the need for capital standards that align more closely with the actual risk profiles of mortgage lending. He noted that a recalibrated approach would enhance banks' ability to serve creditworthy borrowers while maintaining safety and soundness.
Bowman also pointed out that stronger bank participation in mortgage lending is crucial for fostering long-term client relationships and profitability. She noted that banks can provide better consumer benefits during economic stress, as evidenced during the pandemic when bank-serviced borrowers were more likely to receive forbearance.
Criticism and Concerns
Despite the positive reception from some industry stakeholders, there are concerns regarding the potential implications of these regulatory changes. Critics argue that overly lenient capital requirements could undermine the stability of the banking system. Jamie Dimon, CEO of JPMorgan Chase, cautioned against regulatory proposals that may adversely affect the economy and urged careful consideration of their impacts.
Conclusion
The Federal Reserve's forthcoming proposals on mortgage capital requirements represent a critical juncture for U.S. banks as they seek to regain their footing in the mortgage market. By potentially recalibrating capital rules to better reflect actual risks, the Fed aims to encourage greater bank participation in mortgage lending, which could enhance affordability and access to credit for consumers. The industry awaits further details and the opportunity to provide feedback on these significant regulatory changes.
