The Federal Reserve is preparing to unveil two mortgage-related regulatory proposals aimed at strengthening and stabilising banks’ role in the United States housing finance system, according to Vice Chair for Supervision Michelle Bowman.
Speaking on Monday at the American Bankers Association’s Conference for Community Bankers, Bowman said the central bank was assessing how prudential regulations may have contributed to a long-running shift of mortgage activity away from traditional banks and towards nonbank lenders.
Her remarks signal a potential recalibration of post-financial crisis capital rules that have reshaped the structure of the mortgage market over the past 15 years.
Bowman noted what she described as “a significant migration of mortgage origination and servicing out of the banking sector” to nonbanks since the global financial crisis.
In 2008, banks originated roughly 60% of U.S. mortgages and serviced nearly all outstanding balances, she said. By 2023, however, banks’ share of mortgage originations had fallen to 35%, while their share of servicing dropped to 45%.
“Taking a step back to understand the magnitude of this change, as regulators, we have a responsibility to determine whether prudential regulations have driven this shift,” Bowman said.
The trend reflects a broader reconfiguration of the housing finance landscape, with nonbank lenders expanding their footprint in origination and servicing as banks adjusted to tighter capital and liquidity standards introduced in the wake of the crisis.
One of the forthcoming proposals would focus on the regulatory treatment of mortgage servicing assets (MSAs), a key factor in banks’ willingness to retain servicing rights.
Currently, banks are required to deduct MSAs from regulatory capital above certain thresholds, while those assets carry a 250% risk weight.
Bowman indicated that the Fed would propose removing the capital deduction requirement, while maintaining the 250% risk weight and seeking public comment on whether that level remains appropriate.
“This change in the treatment of mortgage servicing assets would encourage bank participation in the mortgage servicing business while recognising uncertainty regarding the value of these assets over the economic cycle,” Bowman said.
MSAs can fluctuate significantly in value depending on interest rates and prepayment behaviour, making them volatile components of bank balance sheets. Easing capital constraints on these assets could increase banks’ incentives to retain servicing portfolios rather than sell them to nonbank firms.
The second proposal under consideration would make mortgage capital requirements more closely aligned with underlying credit risk.
Bowman said the Fed would examine whether to adopt a more “risk-sensitive” framework for residential real estate exposures.
One option would be to determine risk weights based on loan-to-value (LTV) ratios, instead of applying a uniform risk weight regardless of LTV.
Under such an approach, lower-LTV mortgages — which generally pose less credit risk — could attract lower capital charges, while higher-LTV loans would carry correspondingly higher requirements.
“This change could better align capital requirements with actual risk, support on-balance-sheet lending by banks, and potentially reverse the trend of migration of mortgage activity to nonbanks over the past 15 years,” Bowman proposed.
Rebalancing the mortgage ecosystem
The proposals reflect growing concern among some policymakers that the rise of nonbank lenders has altered the risk profile of the mortgage market.
Unlike banks, nonbanks are not subject to the same prudential capital and liquidity standards, though they remain overseen by a combination of state and federal regulators.
By adjusting capital rules to make mortgage origination and servicing more attractive for banks, the Fed appears to be seeking a more balanced distribution of activity between regulated depository institutions and nonbank entities.
Bowman did not provide a specific timeline for releasing the proposed rules but indicated that formal proposals would be issued soon for public comment.
If adopted, the changes would mark one of the most significant adjustments to bank mortgage capital treatment in years, potentially reshaping incentives in a market that underpins a substantial portion of U.S. household wealth and financial stability.
