Under pressure from the mortgage industry the Federal Reserve Board has ditched a stringent and complex Basel III risk-based capital rule for residential mortgages and decided to leave the current risk weights in place for all banks.
“The final rule will retain the current risk weights for residential loans,” Fed Gov. Elizabeth Duke said Tuesday at a Fed board meeting.
In June 2012, the Federal Reserve along with the other banking regulators proposed not to recognize private mortgage insurance as a compensating factor in calculating loan-to-value ratios or risk weightings.
Conventional loans with LTV ratios above 80% that currently have a 50% risk weight due to MI would have been pushed into a 75% or 100% risk weighting.
The banking regulators also proposed to raise the risk weights up to 200% for certain balloon and interest-only loans. The highest risk rating under the final rule is 100%.
Community banks and others complained the
In heeding those concerns, Fed governors were also responsive to concerns that implementation of the qualified mortgage and other Dodd-Frank Act rules along with a stricter capital regime could have an adverse impact on the mortgage market.
“It would be prudent to wait and see how those regulations all affect each other and affect mortgage lending,” one staffer said at Tuesday’s board meeting. “Not changing the risk weights at this time will give the agencies and the board time to see all the regulations interact and affect mortgage lending,” the staffer said.
The final Basel III capital rule retains the current range of risk weights of 50% to 100% for residential mortgages.
However, the final rule penalizes large banks with high concentrations of mortgage servicing rights and it raises the risk weighting for acquisition, development and construction loans to 150%.
MSRs are subject to capital deductions “if they surpass an individual limit of 10% of common Tier 1 capital,” according to a Fed memo on the final rule.
