Bowman advocates regulatory changes for bank mortgage lending

Michelle Bowman, Vice Chair for Supervision, addressed a concerning trend: the significant migration of mortgage origination and servicing out of the banking sector.

Data shows banks originated 60 percent of mortgages in 2008, holding servicing rights on 95 percent of balances.

By 2023, these figures had sharply contracted to 35 percent for originations and 45 percent for servicing.

This shift is attributed, in part, to the regulatory environment, particularly the capital treatment of mortgage servicing rights (MSRs).

Bowman emphasized that this out-migration has proven costly for banks, consumers, and the overall stability of the mortgage system, suggesting current capital requirements are disproportionate to the actual risks involved in these activities.

The migration of mortgage activities from banks impacts several stakeholders.

For banks, mortgages are crucial for revenue diversification and fostering customer relationships, as home purchases are key life milestones.

Retaining servicing in-house builds loyalty and provides stable fee income.

Banks also possess structural advantages like access to stable funding for escrow balances and advancing payments.

For consumers, reduced bank participation means less choice and competition, potentially increasing costs.

Furthermore, borrowers with nonbank servicers fared worse during COVID-19, being less likely to receive forbearance.

From a financial stability perspective, nonbank servicers present vulnerabilities due to less robust regulatory and resolution frameworks compared to banks.