Fed’s Bowman Signals New Mortgage Capital Rules for US Banks

The Federal Reserve is poised to release an updated and revised Basel III Endgame framework for the banking system soon. One change could be new mortgage capital requirements for U.S. banks.

Fed Vice Chair for Supervision Michelle Bowman has said the central bank is inching closer to unveiling new mortgage-loan requirements.

Bowman, speaking at an American Bankers Association event on Feb. 16, said regulators are weighing ways to make capital requirements for residential mortgages more “risk‑sensitive.”

One option under consideration would tie a mortgage’s risk weight to its loan‑to‑value ratio, replacing the current one‑size‑fits‑all approach.

If lenders tie mortgage risks to loan-to-value ratios, they will no longer face a flat capital charge across all mortgages on the books. A lower ratio, for example, would report smaller risk weights and reduced capital 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 stated in prepared remarks.

Another proposal under consideration is to remove the rule mandating banks to deduct mortgage‑servicing assets from regulatory capital, even as those assets continue to carry a 250 percent risk weight.

The Fed will also seek comment from the banking industry regarding possible changes.

“These potential changes would address legitimate concerns about mortgage market structure while maintaining appropriate prudential safeguards,” she said.

“By creating a resilient mortgage market that includes robust participation from all types of financial institutions, we can deliver affordable credit and high-quality servicing to borrowers regardless of economic conditions.

“Strengthening bank participation in these activities does not threaten the safety and soundness of the banking system.”

Various changes could be made across the U.S. mortgage market in the coming months.

In addition to the Fed’s regulatory proposals, the White House is weighing different options to restore affordability, such as offering 50-year mortgages or purchasing mortgage-backed securities.

A key component of the blueprint would require banks to maintain greater amounts of capital to protect themselves against major losses during economic upheaval.

Proponents say it would enhance financial stability and ensure the global banking system can weather turmoil in the broader economy and financial markets.

“The journey to improve capital requirements since the Global Financial Crisis has been a long one, and Basel III endgame is an important element of this effort,” then-Fed Vice Chair for Supervision Michael Barr said at a September 2024 Brookings Institution event.

Critics, however, warn that it would make the United States less competitive and lead to harmful outcomes for businesses and U.S. households.

“Good regulations and good regulators are critical to maintain the strength of our banking system.”

Following rigorous debate and the appointment of a new top regulator at the central bank, a more industry-friendly version could be unveiled soon.

In September, at a conference hosted by Georgetown University, Bowman stated that the Fed was working with officials at the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency on updates to capital rules.

Bowman has expressed support for a less stringent Basel model.

As a result, it has been widely expected that regulators appointed by President Donald Trump would impose rules that are more responsive to industry worries, likely resulting in a lighter capital impact on financial institutions.

“I don’t think that just trying to make sure that all of our regulations work well together and are transparent, and we can hold our banks accountable as well as our supervisors accountable is a lighter touch,” Bowman said this past fall.

“It’s not my expectation that we’ll have fewer requirements, or that you know that capital will go down as a result of the work that we’re doing, necessarily, but we want to make sure that all of our requirements work together.”

This is in stark contrast to the previous administration, which had endorsed a plan that would have substantially raised capital requirements for large banks.