Regulators, she said, must examine whether prudential standards contributed to the contraction and whether the standards reflect the actual risks involved.<\/p>\n
\u201cIn part, this results from over calibration of the capital treatment for these activities, resulting in requirements that are both disproportionate to risk and that make mortgage activities too costly<\/a> for banks to engage,\u201d Bowman said. \u201cI see a path forward that incorporates both renewed bank participation in the mortgage market and a safe and sound banking system.\u201d<\/p>\n Capital rules, market consequences<\/p>\n Bowman\u2019s speech focused heavily on 2013 changes to the capital treatment of mortgage servicing rights<\/a> (MSRs).<\/p>\n These revisions increased risk weights for many institutions and imposed a deduction threshold that applied extra penalties once MSRs exceeded a set percentage of capital. She acknowledged the original rationale behind the rules.<\/p>\n \u201cAt the time, regulators tightened MSR capital treatment for sound reasons,\u201d Bowman said. \u201cMSR valuations can be challenging to calculate because they are not based on transaction prices in liquid markets. Instead, they are derived from models that depend on subjective assumptions about mortgage prepayment and the likelihood of default.<\/p>\n \u201cThis makes the valuations volatile, especially during interest rate swings, and we have observed that during periods of high defaults, some MSR markets can experience stress or seize up.\u201d<\/p>\n Still, she cautioned that the pendulum may have swung too far.<\/p>\n \u201cThese are legitimate concerns, and I want to be clear that holding MSRs is not the right choice for every bank,\u201d Bowman added. \u201cSuccessfully managing the volatility in MSR valuations as interest rates change requires sophisticated hedging capabilities or an effective borrower retention strategy during refinancing waves<\/a>.\u201d<\/p>\n Over time, Bowman said, regulators have gained greater insight into how capital treatment influences pricing and participation decisions.<\/p>\n Because banks securitize a large share of loans to low- and moderate-income borrowers<\/a>, she suggested the MSR framework may have implications for mortgage availability and affordability<\/a>.<\/p>\n She also raised concerns that uniform risk weights for mortgages \u2014 regardless of loan-to-value (LTV) ratios \u2014 fail to reflect differences in default probability and loss severity.<\/p>\n \u201cIn light of these considerations, I am open to revisiting whether the capital treatment of MSRs and mortgages is appropriately calibrated and is commensurate with the risks,\u201d Bowman said.<\/p>\n Basel changes on the horizon<\/p>\n Bowman outlined two forthcoming proposals within the Basel capital framework<\/a>.<\/p>\n The first would eliminate the requirement to deduct mortgage servicing assets from regulatory capital while retaining a 250% risk weight, with regulators seeking comment on whether that level is appropriate.<\/p>\n The second would introduce greater risk sensitivity for residential mortgage exposures \u2014 potentially tying capital requirements to LTV ratios instead of applying a uniform standard.<\/p>\n \u201cThese potential changes would address legitimate concerns about mortgage market structure while maintaining appropriate prudential safeguards,\u201d Bowman said. \u201cI look forward to receiving feedback from industry and other stakeholders as we consider these modifications.\u201d<\/p>\n She closed the speech by emphasizing that stronger bank participation and a safe system are not mutually exclusive.<\/p>\n \u201cBy creating a resilient mortgage market that includes robust participation from all types of financial institutions, we can deliver affordable credit and high-quality servicing<\/a> to borrowers regardless of economic conditions,\u201d Bowman said. \u201cStrengthening bank participation in these activities does not threaten the safety and soundness of the banking system. These goals are consistent.\u201d<\/p>\n MBA endorses proposals<\/p>\n In a statement released after the speech, the Mortgage Bankers Association<\/a> (MBA) endorsed Bowman\u2019s approach.<\/p>\n