The Federal Reserve is moving closer to releasing its revised Basel III Endgame proposal, and the mortgage market could look very different as a result. Basel III is a global framework, developed after the 2008 financial crisis, designed to ensure banks hold enough capital to absorb losses during periods of economic stress.
Fed Vice Chair for Supervision Michelle Bowman is considering a proposal that would tie mortgage capital requirements to loan-to-value ratios, replacing the uniform risk weight applied to mortgage originations. Doing so would lower the capital requirements for mortgages with lower loan-to-value ratios, as they carry lower expected losses compared to mortgages with higher loan-to-value ratios.
The impact of this change could be significant as the share of mortgage originations from banks have fallen from 60% in 2008 to 35% in 2023. The new capital requirements aim to reverse that trend by making it more economically viable for banks to originate and hold mortgages on their balance sheets. The overall goal is to have greater bank participation in the mortgage market that would benefit consumers and create greater financial stability.
Sources: Bloomberg, Federal Reserve
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