By Katanga Johnson
Source: Bloomberg
US lenders are poised to see new mortgage-loan requirements as the Federal Reserve comes closer to unveiling a long-awaited bank capital proposal tied to Basel III.
Michelle Bowman, the Fed’s top bank cop, said parts of that new measure related to residential real estate would consider increasing the “risk sensitivity” of capital requirements for mortgage loans on bank books. One approach would be to use loan-to-value ratios to determine the applicable risk weight for residential real estate exposures, rather than applying a uniform risk weight.
“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 said on Monday in prepared remarks at an American Bankers Association event in Florida.
Trump-era regulators have been working on a new bank capital proposal that would be less burdensome on the biggest US banks than a Biden-era plan, Bloomberg News previously reported. That earlier proposal — which included some stiffer mortgage capital requirements — was never finalized amid fierce opposition from the bank industry.
Bowman said Monday regulators would also seek comment on the so-called risk weights tied to some mortgages.
“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,” Bowman said on Monday.