Bowman advocates Basel changes to boost bank mortgage lending

In 2008, banks originated around 60 percent of mortgages and serviced about 95 percent of mortgage balances.

By 2023, these figures had dramatically contracted to just 35 percent and 45 percent, respectively.

This migration of mortgage activity to nonbanks has significant implications for banks, consumers, and overall financial stability.

For banks, it means lost revenue diversification and weakened customer relationships, as mortgage lending is a core relationship-building service.

Consumers face reduced choice and competition, with evidence suggesting they fare worse with nonbank servicers during financial distress, such as during COVID-19 forbearance.

From a financial stability perspective, nonbank servicers pose risks due to less robust regulatory and resolution frameworks compared to banks, a concern highlighted in a recent Financial Stability Oversight Council report.

Bowman attributed the migration largely to the 2013 changes in capital treatment for mortgage servicing rights (MSRs).

These revisions increased risk weights and introduced a deduction threshold, making mortgage activities disproportionately costly for banks.

While acknowledging the legitimate concerns that led to tighter rules, such as MSR valuation volatility, Bowman argued regulators now better understand MSRs and their impact.

She noted the current capital treatment affects mortgage availability for low-to-moderate income borrowers.

Furthermore, uniform risk weights for mortgages, regardless of loan-to-value (LTV) ratios, misalign capital requirements with actual risk, penalizing banks for holding low-LTV mortgages with low expected losses.