Last week, Vice Chair for Supervision at the Federal Reserve Board of Governors Michael Barr announced a re-proposal of the new capital rules for banks that would significantly improve treatment of mortgages for low- and moderate-income Americans, especially first-time homebuyers. The announcement followed broad criticism of the rule proposed last summer, known as the Basel III Endgame. NHC led a diverse coalition of organizations opposed to major provisions of the rule, especially the capital increase for loans with home mortgage downpayments below 20 percent.
At a speech before the Brookings Institution, Barr announced that the new proposal would eliminate the “gold plating” of capital requirements on mortgages, reducing the current treatment of mortgages with loan-to-values (LTV) of higher than 90% and leaving the treatment of mortgages with LTV’s between 90 and 100 unchanged. The “broad and material changes to both proposals,” Barr said, “would better balance the benefits and costs of capital in light of comments received, and result in a capital framework that appropriately reflects the risks of bank activities and is tiered to the banking sector.”
NHC lauded the announcement in a press release, commending the regulators. “It is clear that the Federal Reserve Board of Governors carefully considered the feedback submitted by a broad range of stakeholders. This is how the regulatory process is meant to work,” we said. “Aligning these loans with the existing capital standards will avoid discouraging lending to homebuyers who do not have the benefit of multi-generational wealth or higher-than-average incomes.”
“We appreciate that the changes consider how capital requirements are balanced with quantifiable risk, avoiding any unintended consequences that could hinder community development investments or lending in underserved areas. Failing to address these issues would have had a devastating impact on efforts to increase homeownership in communities of color and disadvantage all low- and moderate-income, first-time, and first-generation homebuyers,” the statement continued.
The Mortgage Bankers Association (MBA) and the National Association of REALTORS®(NAR) also issued statements in support of the changes. “It appears that common sense has prevailed,” said Bob Broeksmith, President and CEO of the MBA. “We support Vice Chair Barr’s recommendations to recalibrate some provisions that would have had negative impacts on single-family housing and commercial real estate finance markets,” noting that the MBA “will continue to advocate for a bank capital framework – including reduced risk-weighting for mortgage servicing rights and warehouse lines – that ensures safety and soundness without reducing mortgage market participation and thus limiting choice and increasing costs for consumers.”
NAR called the re-proposal “a win for the housing market, Realtors®, and consumers. By making it easier for banks to support low down payment loans, these changes should ensure continued access to affordable home financing. The proposal laid out by the Federal Reserve also recognizes the strength of changes made more than a decade ago to regulation and oversight of the housing finance industry in the wake of the subprime crisis. We applaud the Fed for this thoughtful adjustment, which ultimately reflects a commitment to a healthy housing market and reinforces the stability we’ve worked hard to achieve.”
The three federal banking regulators, the Office of the Comptroller of the Currency, the Fed, and the Federal Deposit Insurance Corporation, proposed the new capital rule in July of 2023. It would have dramatically increased the capital treatment of most mortgage loans. Prior to the proposal’s approval by regulators, a diverse group of housing groups including NHC, the MBA, NAR, the NAACP, and the National Urban League wrote to banking regulators warning of the damage that could be done to first-time and especially first-generation homebuyers by a proposed bank capital rule.
The proposed rule would implement the final components of the Basel III agreement and are known as the Basel III Endgame. It was intended to strengthen the banking system. In his remarks at the time, Fed Vice Chair for Supervision Michael Barr acknowledged that “we are aware of concerns that the overall increase in capital requirements would be significant, and I look forward to comments in that regard.” Barr went on to say that he “…will pay close attention to and encourage thoughtful comments. Any rule will only benefit from a diversity of well-reasoned and good faith arguments. I look forward to the comments we will receive.”
Not everyone was pleased. The Bank Policy Institute (BPI) expressed skepticism that the re-proposed rule would be adequate to gain their support. “We remain concerned about the process and the analytical rigor behind the proposal,” they said in a statement issued after the Barr announcement. “The focus should not be on reaching a politically expedient top line number but rather a bottom-up evaluation of each aspect of the rule to ensure it is based on data and proper analysis, not just a haircut on faulty math of the original proposal,” they said. BPI launched a major lobbying campaign with televised advertising against the rule last year.
The Financial Services Forum (FSF), which represents the largest banks in the country, produced a televised ad as well. Its statement about the re-proposed rule was more circumspect, stating that they “look forward to reviewing the revisions and participating fully in the public comment process.” FSF noted the importance of addressing the concerns “raised by a wide range of commenters citing the likely costs on families and businesses of all sizes. The agencies should also provide detailed quantitative analysis and policy justification.” NHC expects the quantitative analysis will be included in the formal re-proposal.
NHC is reconvening our comment letter working group to thoroughly review the new proposal when it is released later this month. Barr said there will be a 60 day comment period, and is welcoming comments on both the new proposal and those sections that were not changed. We look forward to the opportunity to review the changes, and anticipate providing any additional technical suggestions as well as expressing our strong support for the proposed changes.