Saying that existing capital rules have discouraged bank participation in mortgage lending, the American Bankers Association and seven other associations today offered proposed reforms to help reverse that trend.
Earlier this week, Federal Reserve Vice Chair for Supervision Michelle Bowman announced the Fed would soon issue proposals to change the regulatory capital framework in ways that incentivize banks to originate and service mortgages. ABA and the other associations made several recommendations for reforms in a joint letter to Bowman and other banking regulators.
“Excessive capital requirements that are misaligned with empirically derived risk assessments can negatively affect the cost of and access to credit,” the groups said.
Recognizing that changes are currently under review, the associations urged the agencies to issue a proposal expeditiously. Among their recommendations:
- Risk weights for mortgage loans can and should more accurately reflect real-world credit performance and avoid unnecessary “gold-plating” or other measures that might make homeownership less attainable for first-time or low- to moderate-wealth borrowers.
- Capital charges and limits or deductions from capital tied to mortgage servicing rights, or MSRs, should be empirically justified and appropriately calibrated.
- The capital framework should promote the continued availability of warehouse lines of credit and other short-term funding that support mortgage origination, servicing and liquidity for MSRs.
- Regulators should recognize that mortgage insurance and proven credit risk transfer mechanisms, including both cash-market and insurance-based executions, can play a critical role in reducing the risk and severity of losses for regulated entities in instances of default, while preserving and enhancing credit options for homeowners.
- The banking agencies and federal housing regulators should take a comprehensive view of the mortgage credit ecosystem, align capital frameworks, and avoid regulatory inconsistencies that could distort the market, reduce competition or inappropriately migrate risks, particularly from private capital to taxpayers.
