Fed wants to help banks regain mortgage business to benefit revenue, relationships

In a closely watched policy address Monday, Federal Reserve Vice Chair for Supervision Michelle W. Bowman laid out a case for recalibrating capital rules to encourage banks to re-enter the mortgage origination and servicing arena — arguing the shift could strengthen both profitability and long-term client relationships.

Speaking at the American Bankers Association Community Bankers Conference in Orlando, Bowman described the dramatic reshaping of the mortgage market since the financial crisis, with nonbank lenders steadily capturing business once dominated by depository institutions.

“In 2008, banks originated around 60 percent of mortgages and held the servicing rights on about 95 percent of mortgage balances,” Bowman said. By contrast, she noted that by 2023, banks accounted for only 35 percent of originations and just 45 percent of servicing activity — a change she characterized as “extraordinary.”

Bowman attributed much of the shift to post-crisis regulatory changes, particularly capital requirements that she suggested may not appropriately reflect the actual risk profile of mortgage-related assets. “This out-migration of origination and servicing has been costly for banks, consumers, and the overall mortgage system,” she said.

At the center of her remarks was a call to reassess how mortgage servicing rights and certain residential mortgage exposures are treated under regulatory capital rules. Bowman said policymakers should consider whether existing standards are “appropriately calibrated,” signaling that revisions could be on the table.

For banks, the issue extends beyond balance sheet strategy. Bowman emphasized that mortgage lending plays a foundational role in relationship banking. “Mortgages are an important component of the business model,” she said, noting that home lending often anchors broader customer engagement. When banks originate and service mortgages, they create opportunities to deepen ties, cross-sell products and reinforce financial resilience — what she described as “a virtuous circle.”

She also pointed to performance during periods of stress as evidence of the value banks can provide in mortgage servicing. During the pandemic, Bowman said borrowers whose loans were serviced by banks were “more likely to receive forbearance… than those with nonbank servicers.” That experience, she suggested, underscores the potential consumer benefits of a more balanced mortgage ecosystem.

Among the changes under consideration, Bowman discussed eliminating the deduction of mortgage servicing rights from regulatory capital and reassessing the risk weights applied to them. She also floated the idea of incorporating greater risk sensitivity into capital standards, potentially tying requirements more closely to loan-to-value ratios and other measurable credit factors.

“These potential changes … could better align capital requirements with actual risk, support on-balance-sheet lending by banks, and potentially reverse the trend of migration of mortgage activity to nonbanks,” Bowman said.

Any significant overhaul would likely require coordination with other regulators and, in some cases, legislative action. Still, Bowman framed the Federal Reserve’s role as an important starting point for reshaping incentives.

Her remarks signal a regulatory pivot aimed at restoring bank participation in a sector that once formed a core pillar of their business. If implemented, the proposed adjustments could reshape competitive dynamics in mortgage lending — with implications for bank revenue growth, customer retention and the broader stability of the housing finance system.