Michelle Bowman, the Federal Reserve‘s vice chair for supervision, used a major industry forum to argue that Basel capital rules have helped to drive mortgage lending and servicing away from banks — and that it’s time to reconsider that approach.
Addressing the American Bankers Association (ABA)’s 2026 Conference for Community Bankers on Monday, Bowman described what she called a troubling structural shift.
“Today, I would like to discuss a concerning trend in our financial system that has significant implications for the banking industry, the stability of the mortgage market, and consumers,” she told attendees. “Whether due to a conscious decision in response to the regulatory environment or other factors, we have seen a significant migration of mortgage origination and servicing out of the banking sector.”
Bowman cited data showing that banks originated roughly 60% of mortgages in 2008 and serviced roughly 95% of outstanding balances. By 2023, these figures had fallen to 35% and 45%, respectively.
Regulators, she said, must examine whether prudential standards contributed to the contraction and whether the standards reflect the actual risks involved.
“In 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 for banks to engage,” Bowman said. “I see a path forward that incorporates both renewed bank participation in the mortgage market and a safe and sound banking system.”
Capital rules, market consequences
Bowman’s speech focused heavily on 2013 changes to the capital treatment of mortgage servicing rights (MSRs).
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.
“At the time, regulators tightened MSR capital treatment for sound reasons,” Bowman said. “MSR 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.
“This 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.”
Still, she cautioned that the pendulum may have swung too far.
“These are legitimate concerns, and I want to be clear that holding MSRs is not the right choice for every bank,” Bowman added. “Successfully managing the volatility in MSR valuations as interest rates change requires sophisticated hedging capabilities or an effective borrower retention strategy during refinancing waves.”
Over time, Bowman said, regulators have gained greater insight into how capital treatment influences pricing and participation decisions.
Because banks securitize a large share of loans to low- and moderate-income borrowers, she suggested the MSR framework may have implications for mortgage availability and affordability.
She also raised concerns that uniform risk weights for mortgages — regardless of loan-to-value (LTV) ratios — fail to reflect differences in default probability and loss severity.
“In 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,” Bowman said.
Basel changes on the horizon
Bowman outlined two forthcoming proposals within the Basel capital framework.
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.
The second would introduce greater risk sensitivity for residential mortgage exposures — potentially tying capital requirements to LTV ratios instead of applying a uniform standard.
“These potential changes would address legitimate concerns about mortgage market structure while maintaining appropriate prudential safeguards,” Bowman said. “I look forward to receiving feedback from industry and other stakeholders as we consider these modifications.”
She closed the speech by emphasizing that stronger bank participation and a safe system are not mutually exclusive.
“By creating a resilient mortgage market that includes robust participation from all types of financial institutions, we can deliver affordable credit and high-quality servicing to borrowers regardless of economic conditions,” Bowman said. “Strengthening bank participation in these activities does not threaten the safety and soundness of the banking system. These goals are consistent.”
MBA endorses proposals
In a statement released after the speech, the Mortgage Bankers Association (MBA) endorsed Bowman’s approach.
President and CEO Bob Broeksmit said the MBA has long sought changes to better align capital standards with the actual risk profiles of mortgage lending and servicing.
“We welcome Vice Chair Bowman’s remarks today outlining a path toward revitalizing bank participation in mortgage lending,” Broeksmit said. “Her recognition that aspects of the current capital framework have discouraged banks from competing for mortgage origination and servicing activity is an important step forward.
“A more appropriately calibrated approach, particularly with respect to mortgage servicing rights and mortgage loans, will strengthen banks’ ability to serve creditworthy borrowers while maintaining safety and soundness.”
Broeksmit added that MBA plans to participate actively once the proposals are released.
“MBA is eager to review the forthcoming proposal and engage through the formal comment process, and we stand ready to work with the Federal Reserve and other regulators to advance a balanced framework that supports sustainable mortgage origination and warehouse lending, robust servicing capacity, and continued access to affordable home financing,” he said.
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