Eight trade groups representing lenders are urging federal regulators to revise bank capital rules by adopting a more tailored risk weight for mortgages held on balance sheets and by significantly cutting the capital charge applied to mortgage servicing rights (MSRs).
In a letter sent Friday to the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, the groups argued that current capital standards have discouraged banks from originating, servicing, holding and securitizing mortgages.
“This has reduced competition, consumer choice and credit availability for aspiring homeowners,” the organizations wrote.
The letter was signed by the American Bankers Association, Consumer Bankers Association, Housing Policy Council, Independent Community Bankers of America, Mid-Sized Bank Coalition of America, Mortgage Bankers Association, U.S. Chamber of Commerce and U.S. Mortgage Insurers.
The groups said the existing framework was designed after the financial crisis to strengthen bank resilience. But they argue the mortgage market has changed significantly since then. Reforms such as the Ability-to-Repay and Qualified Mortgage rules now limit risky features like negative amortization, option ARMs, interest-only loans and no-documentation mortgages.
Bank participation in mortgages has fallen during that period. Banks accounted for roughly 60% of mortgage originations and 95% of MSR ownership in 2008. By 2023, these shares had declined to about 35% and 45%, respectively.
The issue gained renewed attention this week after Fed Vice Chair Michelle Bowman anticipated regulators will consider recalibrations to how residential mortgages and MSRs are treated under capital rules. A broader Basel III proposal floated in 2023 was later abandoned.
The trade groups’ letter was addressed to Bowman, Comptroller of the Currency Jonathan Gould and FDIC Chair Travis Hill.
At the center of the request is how much capital banks must hold against mortgages. The groups argue that risk weights for loans held on balance sheets should better reflect actual credit performance, particularly by incorporating loan-to-value ratios and recognizing the added protection provided by private mortgage insurance and other risk-sharing tools.
At the same time, they called the current 250% capital charge on MSRs overly punitive and proposed reducing it to 100% for all banks. They also urged regulators to raise or eliminate existing caps on how much MSRs can count toward core capital, and to exempt smaller banks that opt into the Community Bank Leverage Ratio from these limits.
The letter also addressed warehouse lending — short-term credit lines banks extend to independent mortgage banks (IMBs) to fund loans before they are sold. The groups proposed reducing the current 100% capital charge on warehouse lines to 50%, arguing that banks control the collateral and can recover funds if a counterparty fails.
“Adequate capital reduces the likelihood of bank failures that threaten broader financial stability, which can prove costly for households, financial institutions, and taxpayers,” the groups wrote. “However, excessive capital requirements that are misaligned with empirically derived risk assessments can negatively affect the cost of and access to credit.”
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