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If it’s not broken – don’t break it! New bank capital standards could undercut efforts to close the homeownership gap

This week, the Federal Reserve Board of Governors and the FDIC Board of Directors are meeting to approve a proposed rule implementing the Basel III endgame agreement for large banks, including adjustments to the surcharge for U.S. global systemically important banks. This rule will have a significant impact on bank lending, carrying broad ramifications for mortgage lending and other housing investments. NHC has significant concerns regarding how this rule may impact many of our highest priorities, including closing the homeownership gap for people of color and urgently needed housing production to mitigate the soaring housing costs, which has a direct impact on inflation and homelessness. NHC will be providing comments on the proposed rule.

There have been several press reports suggesting that the rule may increase capital treatment for mortgages with lower down payments. I hope that these reports are not true, as such a move would represent a dramatic departure from current rules and could discourage banks from making loans to lower-wealth Americans. In fact, this approach seems to contradict the principles of fair housing by exacerbating disparities and potentially violating the Fair Housing Act. I am also concerned that the response to recent bank failures, by going beyond already strict Basel III capital rules, violates the basic rule that if it’s not broken, don’t break it. The failure of Silicon Valley Bank had nothing to do with mortgage lending. The primary cause of its failure was incompetent risk management and inadequate supervision, leading to a large depositor bank run.  No amount of stress testing or additional capital would have prevented SVB’s failure.

NHC has expressed our concerns directly to the regulators and explained, as have many of our colleagues, that this treatment should not be included in the proposed rule. I’m happy to provide additional comments on the crucial aspects of capital treatment, such as the treatment of mortgage servicing rights and warehouse lines of credit, once we have thoroughly reviewed the proposed rule. But the issue of raising capital based on loan-to-value (LTV) is bad policy and bad politics. It will likely ignite a toxic debate about so-called “woke policies” and raise real concerns about fair housing that have no part in any regulatory proposal.

All Federal regulators have an obligation under the Fair Housing Act of 1968 to affirmatively further fair housing. Increasing the capital requirement for loans with higher LTVs could have a devastating impact on efforts to close the homeownership gap for Black, Latino, AAPI, and Native American borrowers.  Amidst nationwide efforts by banks to address the homeownership gap and financial institutions adopting Special Purpose Credit Programs to improve racial equity, requiring an unprecedented and unnecessary level of capital for high LTV mortgage loans risks moving the entire industry in the wrong direction. Such a move may limit credit access for borrowers of color.

Homeownership is widely recognized as the primary way that most Americans build wealth. Unfortunately, historical and ongoing discriminatory housing policies have resulted in Black and Latino families, as well as other people of color, being excluded from having equitable access to homeownership, even when they have sufficient income to cover debt service. As a result, persistent and growing racial wealth gaps continue with many hardworking families lacking the resources to save for a down payment to purchase their first home. Additionally, many multi-generational homebuyers receive down payment support from their family members, especially their homeowner parents. As the FDIC itself noted in its own report on Down Payment and Closing Cost Assistance, “For many low- and moderate-income people, the most significant barrier to homeownership is the down payment and closing costs associated with getting a mortgage loan.”

According to a report by the Center for Responsible Lending, it would take 14 and 11 years respectively for Black and Latino renter households at each of their median incomes to acquire enough funds to afford a 5% down payment and associated closing costs for a median-priced home. In contrast, White renter households need 9 years to save for a 5% down payment, thus benefiting from an earlier entry into homeownership and its wealth-building advantages. Disincentivizing lower downpayments would make it impossible for many creditworthy borrowers to ever save enough for a downpayment.

Modern mortgage banking has long evaluated risk using a wide range of compensating factors including reserves, rental housing payment history, credit history, debt-to-income ratios, and mortgage counseling. Increasing capital requirements based on LTV as a single factor will unfairly hurt those borrowers who lack multi-generation wealth or have lower incomes. In addition, mortgage insurance more than offsets any risk that may be associated with mortgages that have LTV ratios above 80 percent.

Any changes in bank capital requirements for mortgages fly in the face of these same regulators’ commitment under the Community Reinvestment Act to encourage banks to invest in branches in the underserved communities where they take deposits. It is incomprehensible and ironic that they would promote the establishment of branches in these communities while discouraging the very lending that they would do there.

I am hopeful that the Fed, FDIC, and OCC will not pave the way for a longstanding policy to be drawn into the culture wars while risking a significant violation of the Fair Housing Act, which they are tasked with enforcing. While some may suggest that there would be ample opportunity to voice concerns in the proposed rules, that denies the clear political reality that this issue would be a toxic genie that could not be put back in its bottle. Let’s not distract from the important work of bank regulation by unnecessarily harming borrowers who need us the most.

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