Vice Chair Bowman Advocates Revitalizing Bank Mortgage Lending

This year, Vice Chair of the Federal Reserve, Bowman, addressed the American Bankers Association Community Bankers Conference, emphasizing the urgent need to revitalize bank mortgage lending. As a former community banker, she appreciates the insights from this community to enhance her regulatory work.

The Shift in Mortgage Originations

Bowman highlighted a significant decline in bank participation in mortgage origination and servicing over recent years. In 2008, banks were responsible for 60% of mortgage originations and held nearly 95% of servicing rights. By 2023, their share plummeted to just 35% of originations and 45% of servicing rights. This trend raises concerns about the financial stability of banking institutions and consumer choices.

Impact on Banks

Mortgages play a crucial role in the banking business model. They not only provide revenue but also facilitate strong customer relationships. When banks engage in mortgage servicing, they improve customer loyalty and ensure a better overall experience.

• Positive customer interactions in mortgage services can lead to increased trust in other banking products.
• Mortgage servicing contributes stable fee income, diversifying revenue sources for banks.
• Banks have advantages in servicing due to better access to funding and customer relationships.

Consequences for Consumers

The decline in bank involvement has limited consumer choices, resulting in heightened costs. Fewer banks in this space mean reduced competition, oftentimes leading to higher rates. During the COVID-19 pandemic, borrowers served by banks received more favorable outcomes, such as forbearance, compared to those with non-bank servicers.

The Need for Reassessment

Bowman stressed that the capital treatment of mortgage servicing rights (MSRs) is a critical factor in the reduction of banks’ market participation. The underlying regulations have made mortgage activities appear costlier than they are, keeping banks from fully engaging. She expressed an openness to reviewing these capital treatments to improve the mortgage market’s structure.

Proposed Regulatory Changes

Two key proposals are set to be introduced to enhance bank involvement in mortgage lending:

• Remove the requirement to deduct mortgage servicing assets from capital while retaining the 250% risk weight.
• Evaluate appropriate risk weights according to loan-to-value ratios for mortgage lending, rather than applying a uniform weight.

Concluding Remarks

Bowman concluded with a vision for a resilient mortgage market that fosters collaboration across various financial institutions. This approach aims to provide borrowers with better access to affordable credit, ensuring consistency and quality in servicing. By refining regulatory frameworks, including those governing capital treatment, the Federal Reserve anticipates a return of banks to the forefront of the mortgage industry, helping to strengthen the overall financial landscape.