Regulators, she mentioned, should look at whether or not prudential requirements contributed to the contraction and whether or not the requirements mirror the precise dangers concerned.
“Partially, this outcomes from over calibration of the capital remedy for these actions, leading to necessities which are each disproportionate to danger and that make mortgage actions too costly for banks to have interaction,” Bowman mentioned. “I see a path ahead that comes with each renewed financial institution participation within the mortgage market and a secure and sound banking system.”
Capital guidelines, market penalties
Bowman’s speech targeted closely on 2013 modifications to the capital remedy of mortgage servicing rights (MSRs).
These revisions elevated danger weights for a lot of establishments and imposed a deduction threshold that utilized further penalties as soon as MSRs exceeded a set share of capital. She acknowledged the unique rationale behind the foundations.
“On the time, regulators tightened MSR capital remedy for sound causes,” Bowman mentioned. “MSR valuations will be difficult to calculate as a result of they don’t seem to be based mostly on transaction costs in liquid markets. As a substitute, they’re derived from fashions that depend upon subjective assumptions about mortgage prepayment and the probability of default.
“This makes the valuations risky, particularly throughout rate of interest swings, and we now have noticed that in durations of excessive defaults, some MSR markets can expertise stress or seize up.”
Nonetheless, she cautioned that the pendulum could have swung too far.
“These are authentic issues, and I wish to be clear that holding MSRs will not be the fitting selection for each financial institution,” Bowman added. “Efficiently managing the volatility in MSR valuations as rates of interest change requires subtle hedging capabilities or an efficient borrower retention technique throughout refinancing waves.”
Over time, Bowman mentioned, regulators have gained larger perception into how capital remedy influences pricing and participation selections.
As a result of banks securitize a big share of loans to low- and moderate-income borrowers, she prompt the MSR framework could have implications for mortgage availability and affordability.
She additionally raised issues that uniform danger weights for mortgages — no matter loan-to-value (LTV) ratios — fail to mirror variations in default likelihood and loss severity.
“In gentle of those concerns, I’m open to revisiting whether or not the capital remedy of MSRs and mortgages is appropriately calibrated and is commensurate with the dangers,” Bowman mentioned.
Basel modifications on the horizon
Bowman outlined two forthcoming proposals inside the Basel capital framework.
The primary would get rid of the requirement to deduct mortgage servicing property from regulatory capital whereas retaining a 250% danger weight, with regulators in search of touch upon whether or not that degree is suitable.
The second would introduce larger danger sensitivity for residential mortgage exposures — doubtlessly tying capital necessities to LTV ratios as a substitute of making use of a uniform customary.
“These potential modifications would tackle authentic issues about mortgage market construction whereas sustaining acceptable prudential safeguards,” Bowman mentioned. “I stay up for receiving suggestions from business and different stakeholders as we take into account these modifications.”
She closed the speech by emphasizing that stronger financial institution participation and a secure system aren’t mutually unique.
“By making a resilient mortgage market that features sturdy participation from all kinds of monetary establishments, we will ship inexpensive credit score and high-quality servicing to debtors no matter financial situations,” Bowman mentioned. “Strengthening financial institution participation in these actions doesn’t threaten the security and soundness of the banking system. These objectives are constant.”
MBA endorses proposals
In a press release launched after the speech, the Mortgage Bankers Association (MBA) endorsed Bowman’s method.
President and CEO Bob Broeksmit mentioned the MBA has lengthy sought modifications to higher align capital requirements with the precise danger profiles of mortgage lending and servicing.
“We welcome Vice Chair Bowman’s remarks at this time outlining a path towards revitalizing financial institution participation in mortgage lending,” Broeksmit mentioned. “Her recognition that facets of the present capital framework have discouraged banks from competing for mortgage origination and servicing exercise is a vital step ahead.
“A extra appropriately calibrated method, significantly with respect to mortgage servicing rights and mortgage loans, will strengthen banks’ capability to serve creditworthy debtors whereas sustaining security and soundness.”
Broeksmit added that MBA plans to take part actively as soon as the proposals are launched.
“MBA is raring to assessment the forthcoming proposal and interact by the formal remark course of, and we stand able to work with the Federal Reserve and different regulators to advance a balanced framework that helps sustainable mortgage origination and warehouse lending, sturdy servicing capability, and continued entry to inexpensive residence financing,” he mentioned.
