ORLANDO, Fla. — Federal Reserve Vice Chair for Supervision Michelle W. Bowman said Monday that bank regulators should reconsider how capital rules treat mortgage lending and servicing, arguing that current frameworks may be discouraging banks from participating in a core line of business and pushing mortgage activity toward nonbank firms.
Speaking at the American Bankers Association 2026 Conference for Community Bankers here, Bowman said the migration of mortgage origination and servicing away from banks has reduced competition, limited consumer options, and raised potential financial stability concerns.
Bowman highlighted data showing banks’ share of mortgage originations falling from roughly 60% in 2008 to about 35% in recent years, while their share of mortgage servicing has dropped sharply as well. She said the shift may reflect regulatory pressures, including capital requirements that make mortgage servicing rights (MSRs) costly for banks to hold. For financial institutions, she argued, mortgages remain essential not only for revenue diversification but also for customer relationship building, cross-selling opportunities and stable servicing fee income.
The speech pointed to capital rules established after the financial crisis — particularly the 2013 treatment of MSRs — as a major factor influencing banks’ decisions to exit portions of the mortgage market. Bowman said the rules increased risk weights and imposed deduction thresholds that can disproportionately affect institutions seeking to build servicing portfolios, especially smaller banks facing high fixed operational costs. She added that capital requirements for mortgages held on balance sheets may also be misaligned with actual risk because they do not differentiate sufficiently based on loan-to-value ratios.
Bowman said the Federal Reserve is preparing two Basel-related proposals intended to encourage greater bank participation in mortgage lending and servicing while preserving prudential safeguards. The proposals would eliminate the automatic deduction of mortgage servicing assets from regulatory capital — while keeping a 250% risk weight initially — and seek comment on whether that level remains appropriate. A second proposal would make mortgage capital requirements more risk-sensitive by incorporating loan-to-value ratios, potentially lowering capital burdens for lower-risk loans and supporting on-balance-sheet lending.
While noting broader mortgage market issues also involve rules outside the Fed’s authority, including those from the Consumer Financial Protection Bureau and Congress, Bowman said recalibrating capital treatment could help restore banks’ role in housing finance without compromising safety and soundness. She emphasized that stronger bank participation alongside nonbanks could improve resilience in the mortgage system and produce better outcomes for borrowers during periods of financial stress.