Key Takeaways
- • U.S. banking regulators (Federal Reserve, FDIC, OCC) proposed sweeping capital rule overhauls that would reduce Tier 1 capital requirements by 4.8–7.8% across bank categories, with largest institutions (Categories I–II) seeing 4.8% reductions and smaller institutions 7.8% reductions.
- • Mortgage servicing rights (MSRs) would shift from capital deductions to a 250% risk weight under the revised framework, designed to incentivize bank participation in mortgage origination and servicing while recognizing valuation uncertainty.
- • Residential mortgage risk weights would now be tied to loan-to-value (LTV) ratios, ranging from 20% for 50% LTV loans to 105% for 100% LTV loans, replacing the current flat 50% risk weight and increasing risk sensitivity.
- • Federal Reserve Vice Chair Michelle Bowman identified a critical structural concern: banks' share of mortgage origination has declined from 60% in 2008 to 35% by 2023, and servicing share dropped from 95% to 45% over the same period, with the regulator signaling willingness to recalibrate capital rules to reverse this trend.
- • The proposals represent a strategic shift to strengthen banks' role in housing finance by reducing capital constraints that have disadvantaged them relative to nonbank lenders and servicers, with public comment period ending June 18.
Summary
Federal bank regulators jointly advanced a comprehensive overhaul of capital rules on April 29, 2026, targeting structural incentives that have eroded bank participation in mortgage markets. The Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) introduced three coordinated measures: revisions to the Basel III framework for large, internationally active banks; adjustments to the Global Systemically Important Bank (GSIB) surcharge; and updates to the U.S. standardized approach. The regulatory package aims to address what Federal Reserve Vice Chair for Supervision Michelle Bowman characterized as a concerning long-term migration of mortgage market activity away from banks toward nonbank firms.
The proposed changes would meaningfully reduce capital requirements across the banking sector. Tier 1 capital requirements would decline by 4.8% for the largest banks (Categories I and II), 5.2% for Categories III and IV, and 7.8% for smaller institutions. A central feature of the overhaul addresses the treatment of mortgage servicing rights (MSRs)—the expected value of income from servicing mortgages after securitization. Rather than applying capital deductions to MSRs, regulators would assign them a 250% risk weight, a change intended to balance incentives for bank participation in mortgage servicing with appropriate recognition of valuation uncertainty across economic cycles.
For residential mortgage exposures, the framework introduces risk weights calibrated to loan-to-value (LTV) ratios, replacing the current flat 50% risk weight. Under the proposal, risk weights would range from 20% for loans with 50% LTV to 105% for loans at 100% LTV, with no dependence on real estate cash flows. This LTV-based approach increases risk sensitivity and aligns capital requirements more closely with actual credit risk profile.
Bowman's remarks at the American Bankers Association 2026 Community Bankers Conference provided regulatory context for these structural changes. Data presented by the Federal Reserve documented a significant shift in market composition: banks' share of mortgage origination declined from roughly 60% in 2008 to approximately 35% by 2023, while their share of mortgage servicing fell from about 95% to roughly 45% over the same period. Bowman identified the current capital framework as a contributing factor to this decline and signaled the Fed's willingness to recalibrate rules to restore competitive incentives for bank participation in mortgage lending and servicing.
The Mortgage Bankers Association responded affirmatively to the proposal. MBA President and CEO Bob Broeksmit stated: "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." The public comment period for the proposals is scheduled to close on June 18, 2026.
The proposed changes would meaningfully reduce capital requirements across the banking sector. Tier 1 capital requirements would decline by 4.8% for the largest banks (Categories I and II), 5.2% for Categories III and IV, and 7.8% for smaller institutions. A central feature of the overhaul addresses the treatment of mortgage servicing rights (MSRs)—the expected value of income from servicing mortgages after securitization. Rather than applying capital deductions to MSRs, regulators would assign them a 250% risk weight, a change intended to balance incentives for bank participation in mortgage servicing with appropriate recognition of valuation uncertainty across economic cycles.
For residential mortgage exposures, the framework introduces risk weights calibrated to loan-to-value (LTV) ratios, replacing the current flat 50% risk weight. Under the proposal, risk weights would range from 20% for loans with 50% LTV to 105% for loans at 100% LTV, with no dependence on real estate cash flows. This LTV-based approach increases risk sensitivity and aligns capital requirements more closely with actual credit risk profile.
Bowman's remarks at the American Bankers Association 2026 Community Bankers Conference provided regulatory context for these structural changes. Data presented by the Federal Reserve documented a significant shift in market composition: banks' share of mortgage origination declined from roughly 60% in 2008 to approximately 35% by 2023, while their share of mortgage servicing fell from about 95% to roughly 45% over the same period. Bowman identified the current capital framework as a contributing factor to this decline and signaled the Fed's willingness to recalibrate rules to restore competitive incentives for bank participation in mortgage lending and servicing.
The Mortgage Bankers Association responded affirmatively to the proposal. MBA President and CEO Bob Broeksmit stated: "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." The public comment period for the proposals is scheduled to close on June 18, 2026.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.