Fed Eyes Regulatory Shift to Lure Banks Back to Mortgage Market

The Federal Reserve is admitting that banks are originating fewer mortgages than before due to its regulations, and is looking to roll back the red tape.

Speaking at the American Bankers Association’s Conference for Community Bankers in Orlando, Fed Governor Michelle Bowman laid out a "new path forward" that aims to reverse the concerning trend of banks retreating from home lending. 

Since the 2008 recession, banks now handle only 35% of mortgage originations, down from 60%. Their share of the mortgage servicing has dropped even more, plummeting from 95% to roughly 45% in 2026.

"The shift of mortgage activities to nonbank lenders has been significant." Bowman said. "It’s important to recognize that this migration moves lending away from the robust oversight and resolution frameworks that banks provide."

To fix this, she proposed a significant change in the calibration of capital requirements. The Fed is now looking at removing the requirement for banks to deduct mortgage servicing assets from their regulatory capital. It is also seeking to replace the current risk weights with a system based more on loan-to-value ratios.

The Fed’s goal here is to regulate costs with actual risks, instead of punishing banks like they have been in recent years, simply for participating in the housing market.

"We should ensure that our regulatory framework does not inadvertently discourage banks from participating in the mortgage market." Bowman stated, "Especially since a healthy banking presence creates a virtuous circle of customer loyalty and financial stability."

By easing the 250% risk weight burden and allowing for more flexibility in Tier 1 capital, the Fed hopes to lure institutions back to a sector they once dominated. 

If these new proposals actually move forward, it would signal the most impactful shift in housing finance policy in a decade, potentially lowering costs for borrowers and bringing back a level of stability to a market that is currently dominated by less-regulated nonbank entities.