US Banks Brace for New Mortgage Capital Rules
US lenders are preparing for new mortgage-related capital requirements as regulators move to finalize Basel III-compliant proposals. Officials have signaled that the new rules will increase "risk sensitivity" for residential real estate assets held by banks. This regulatory shift could significantly impact banks' mortgage origination strategies and balance sheet management.
- The proposed rules would replace a relatively flat risk-weighting system for mortgages with a more granular approach tied to loan-to-value (LTV) ratios. Mortgages with higher LTVs would be assigned a higher risk weight—ranging from 40% to 125%—requiring banks to hold more capital against them. - A key change in the July 2023 proposal involves the treatment of mortgage-servicing assets (MSRs), which would see their risk weight increase from 100% to 250% for amounts below the regulatory capital deduction threshold. - The initial "Basel III Endgame" proposal would have applied to all banks with over $100 billion in assets and was projected to increase their required highest-grade capital by an average of 16%. However, Federal Reserve officials have since indicated that "broad and material changes" will be made to the original proposal. - Industry groups like the Mortgage Bankers Association have argued that the proposed capital hikes could disproportionately affect first-time and low-to-moderate-income homebuyers, who often rely on loans with lower down payments. - One of the goals stated by Federal Reserve officials for revising the rules is to potentially reverse the trend of mortgage lending migrating from regulated banks to non-bank financial institutions over the last 15 years. - Critics have argued that the U.S. proposal "gold-plates" the international Basel standards by setting higher risk weights for residential mortgages than the Basel Committee on Banking Supervision's own framework. - Following significant industry pushback, a revised proposal is expected to be released soon. The original implementation date of July 1, 2025, is now considered unlikely, with a phased-in compliance period now anticipated to begin in 2027 or later. - The proposed framework would also eliminate the ability for large banks to use their own internal models for calculating credit and operational risk capital, mandating a new standardized approach for all institutions with over $100 billion in assets.
