In a move that could have far-reaching implications for the mortgage market and the U.S. economy, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) unveiled sweeping changes to the capital requirements for banks holding assets over $100 billion in late July. This Basel "end game" proposal intends to align U.S. regulations with the Basel III standards and responds to recent significant bank failures.
The Mortgage Bankers Association (MBA) has voiced strong opposition to the Basel capital rule changes, pointing out seven key areas that could affect major banks and regional banks, lenders, servicers, and borrowers within the housing finance ecosystem. Here's a closer look at these crucial concerns:
Increased Minimum Capital Requirements: The proposal includes a 15-20% rise in overall minimum capital standards for larger banks, potentially stifling lending and stunting economic growth. The lack of substantial economic analysis on this front raises alarming questions.
A Shift in Business Decisions: The comprehensive changes in capital rules for credit, operational, and market risks may cause banks to alter or abandon specific lines of business without a clear understanding of which sectors might be negatively affected.
Effects on Consumer and Business Borrowers: The increased capital levels will likely have second-order effects on borrowers, but the precise nature of these consequences is unclear due to insufficient details provided by the regulatory agencies.
Changes to Single-Family Mortgages: The proposed rule alters the capital treatment of single-family mortgages, increasing risk weights and potentially affecting larger banks' participation in various mortgage-related businesses. These changes come despite a strong and resilient mortgage market with record-low delinquencies, raising questions about the timing and rationale.
Harsher Treatment of Mortgage Servicing Rights (MSRs): The proposal reimposes a 10% cap on MSRs, potentially diminishing MSR demand, liquidity, and valuations, which may impact independent mortgage bankers (IMBs) and other originators negatively.
Broader Impact on the Mortgage Market: The changes will have a ripple effect, affecting IMBs, community banks, credit unions, and customers. The MBA fears that this could lead to higher interest rates for borrowers and more regulatory pressure on IMBs.
Potential Reduction in Support for Warehouse Lending and MSR Financing Businesses: With already high-risk weightings, banks may reduce or eliminate their exposure to comply with the new rules, further weakening the housing finance system.
Despite a combined 7-4 vote passing the rule, the slim margin reflects serious concerns among the FDIC and Fed boards, including a hesitant "yes" from Fed Chair Jerome Powell. Previous Basel proposals had received unanimous support.
Comments on the proposal are open until Nov. 30, 2023, and a three-year transition period is slated to begin on July 1, 2025. Nevertheless, market participants should be wary, as banks are likely to start adapting to the rule as soon as it becomes final.
MBA's early opposition to the Basel capital rule changes has placed a spotlight on the proposed rule, highlighting the potentially adverse impact on the macro economy and housing finance system. The extensive 1100-page proposal requires more thorough analysis, but the mortgage-related provisions have already led the MBA to express vehement resistance to portions undermining the housing finance ecosystem.
This major capital proposal reflects not merely "big bank stuff" but something with the potential to reshape the mortgage market fundamentally. Its future consequences for housing, the economy, and lending remain fraught with uncertainty, raising the stakes for all stakeholders involved.
