Senators raise concerns that regulators’ proposal would increase borrowing costs and price families out of homeownership
NASHVILLE, TN—United States Senator Bill Hagerty (R-TN), a member of the Senate Banking Committee, today led his colleagues in sending a letter to Federal Reserve Chair Jerome Powell, Vice Chair Michael Barr, and Acting Comptroller of the Currency Michael Hsu raising concerns over the Basel III Endgame proposal, which would impose excessive capital requirements that hike mortgage costs and make it more difficult for families to achieve homeownership.
In the letter, the Senators stressed that U.S. regulators’ proposal to increase mortgage loan capital requirements is significantly more punitive than the proposals adopted by the Basel Committee. To preserve Americans’ access to credit and ensure that bank lending remains economically viable, the Senators urged regulators to revisit their proposal.
“We write to express our concern regarding the capital requirements for mortgage loans contemplated by your July proposal to implement the Basel Committee’s Endgame standards,” the Senators wrote. “To improve the risk sensitivity of the bank capital framework, the U.S. bank regulators worked closely with their international counterparts through the Basel Committee to develop updated mortgage capital requirements that are better aligned with the latest evidence of the underlying risk.”
The Senators explained their concern with the proposals’ potential to both “increase borrowing costs for all borrowers” and “make portfolio lending uneconomic business for large banks.“
Relatedly, current regulations allow a bank to consider the risk-reducing effects of private mortgage insurance (PMI) when determining the loan’s LTV and its qualification as a prudently underwritten mortgage and thereby qualifying for a lower risk weight,” the Senators continued. “By disallowing these adjustments, your proposal would further exacerbate the concerns above.”
“We strongly encourage you to carefully consider all of these recommendations, along with the various stakeholder comments you receive with an eye to maintaining a deep, liquid, and competitive market for mortgages, in which banks can prudently participate in helping American homeowners achieve the dream of sustainable homeownership,” the Senators concluded.
Co-signers of the letter include Senators Thom Tillis (R-NC), J.D. Vance (R-OH), Katie Britt (R-AL), Michael Rounds (R-SD), Kevin Cramer (R-ND), and Mike Crapo (R-ID).
A copy of the letter can be found here and below.
Dear Chairman Powell, Vice Chair Barr, and Acting Comptroller Hsu:
We write to express our concern regarding the capital requirements for mortgage loans contemplated by your July proposal to implement the Basel Committee’s Endgame standards.
To improve the risk sensitivity of the bank capital framework, the U.S. bank regulators worked closely with their international counterparts through the Basel Committee to develop updated mortgage capital requirements that are better aligned with the latest evidence of the underlying risk. These Endgame mortgage capital requirements vary by loan-to-value ratio (LTV) but generally are lower or the same as the current U.S. mortgage capital requirements that were adopted in 1989.
Your proposal does not adopt the Endgame mortgage capital requirements. You instead contemplate adding a significant surcharge to these requirements, such that many mortgage loans will see an increase in required capital. No loss history or other evidence was offered to support this approach.
We have two primary concerns. First, by increasing the capital requirement for mortgage loans with higher loan-to-value ratios, your proposal could increase borrowing costs for all borrowers, but more damaging for low- and moderate-income and other historically underserved borrowers who cannot always afford a 20% down payment. That will make it that much harder for these families to achieve homeownership.
Second, by capitalizing mortgage loans far in excess of the underlying risk, your proposal would needlessly make portfolio lending an uneconomic business for large banks. That will not only have an adverse impact on banks’ businesses and diversification, but also will continue to increase risk to financial stability by pushing mortgage lending out of banks and concentrating it in non-banks, in particular the $8 trillion monoline government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac.
Relatedly, current regulations allow a bank to consider the risk-reducing effects of private mortgage insurance (PMI) when determining the loan’s LTV and its qualification as a prudently underwritten mortgage and thereby qualifying for a lower risk weight. By disallowing these adjustments, your proposal would further exacerbate the concerns above. We urge you to reconsider and provide an appropriate level of credit for private credit enhancement in the form of private mortgage insurance and credit risk transfer when calculating the capital charges associated with these mortgages. We see this as an important tool in fostering access to credit for underserved borrowers who often lack large downpayments while helping manage and mitigate financial institutions’ overall mortgage credit risk exposure.
Moreover, we are concerned that just as your proposal disincentivizes banks from offering mortgages to be held on balance sheet, it simultaneously disincentivizes banks from originating mortgages for sale via agency or non-agency securitization. This derives from the disproportionate impact of the proposed operational risk charge on fee-based income businesses such as mortgage origination and distribution. This aspect of your proposal is likely to further push agency-eligible borrowers to non-bank originators and the GSEs, thereby reducing consumer choice and competition, but it could have an even more severe adverse impact on borrowers ineligible for agency securitization due to income verification requirements under the CFPB’s ability-to-repay regulations. These “non-QM” borrowers could include many gig-economy and self-employed workers who may find their options for reasonably priced mortgages even more diminished if they continue to exist at all. We thus strongly encourage you to consider adjusting the income calculation under the operational risk component, including but not limited to the calibration of the operational risk component’s internal loss multiplier. These changes would help to prevent a resulting adverse impact on mortgage origination and servicing.
Finally, we agree that your July proposal should not apply to community banks. However, in our view, there is a compelling case for extending an option to community banks to elect into these more risk-sensitive, empirically supportable, and modernized Endgame mortgage capital requirements should they wish to do so.
In conclusion, to mitigate risks to financial stability and preserve access to credit for borrowers including underserved borrowers, it is critical that the capital requirements for mortgage loans are consistent with the actual risk on these exposures. To that end, we urge you to (a) adopt the Endgame mortgage capital requirements based on LTV as finalized by the Basel Committee, (b) drop the so-called 20% surcharge imposed by your proposal, (c) restore appropriate credit for private mortgage insurance, and (d) reconsider the impact of the operational risk component on mortgage securitization markets for agency and non-agency borrowers. This approach would broadly be more consistent with the capital requirements developed by the Federal Housing Finance Agency for Fannie Mae and Freddie Mac, providing for greater alignment in regulatory treatment by large institutions irrespective of charter type which should remain a key goal of the post financial crisis regulatory framework.
The U.S. bank regulators played a central role in the development of these requirements through multiple administrations. The Endgame mortgage capital requirements appropriately provide a more granular treatment of mortgage credit risk exposures that are empirically derived and defensible, whereas, your proposal does the opposite. Indeed, Urban Institute experts have published research that the Endgame mortgage capital requirements are generally aligned with the underlying risk on mortgage exposures. We strongly encourage you to carefully consider all of these recommendations, along with the various stakeholder comments you receive with an eye to maintaining a deep, liquid, and competitive market for mortgages, in which banks can prudently participate in helping American homeowners achieve the dream of sustainable homeownership.
Sincerely,
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