- Key Insight: Experts say even if regulators recalibrate capital standards, structural and competitive realities that did not exist before 2008 are the biggest drivers in their dwindling market share in mortgage origination and servicing. Nonbanks now dominate the sector, aided by leaner cost structures that are built for rate volatility — advantages that banks will have a hard time imitating.
- Expert Quote: "Everybody's looking for that one magic bullet. There's no one magic bullet here. A series of changes since the financial crisis have made it more difficult for community banks to be in the mortgage business." — Ron Haynie, senior vice president of mortgage policy, Independent Community Bankers of America.
- Forward Look: Fed Vice Chair for Supervision Michelle Bowman said in a February appearance that two proposals will be published for industry comment in the near future, but acknowledged in her Senate Banking Committee testimony Feb. 26 that further hurdles remain.
WASHINGTON — Proposed regulatory changes aimed at bringing banks back into the mortgage market are drawing muted enthusiasm, with industry stakeholders welcoming the changes but cautioning that they alone are unlikely to turn the tide.
Bank stakeholders say changes to the risk-based capital weight of mortgages
But industry experts point to additional hurdles that would need to be addressed alongside Basel III, including reporting requirements under the Truth in Lending Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act. There are also competitive concerns, with nonbank mortgage lenders having spent more than a decade building operations that scale efficiently.
"I think these changes are a welcome and a necessary condition to banks participating more in the mortgage market, though I'm not sure if they on their own would be sufficient," commented Matthew Bisanz, a partner at Mayer Brown.
The effort to bring more commercial and community banks back into the mortgage market after their post-2008 exodus is rooted in a simple premise: Banks generally hold more capital and operate under stricter regulatory oversight, factors supporters say could bolster stability in a future downturn. Greater bank participation also could increase competition, potentially leading to lower interest rates and more competitive pricing for borrowers.
Over the past 15 years, bank participation has declined amid tighter regulations and False Claims Act suits filed by the Justice Department after the 2008 financial crisis. As of 2023, banks originated 35% of mortgages and serviced 45%, down from about 60% originated and 95% serviced in 2008.
The Basel III endgame with a twist
In a mid-February speech, Bowman said two Basel III-related proposals are forthcoming to address challenges banks face in the mortgage market.
The proposals would revise the capital treatment of mortgage servicing assets and adjust broader capital requirements tied to mortgage activity. Both are expected to be released for public comment in the near future.
"'[The] overcalibration of the capital treatment for these activities [have resulted] in requirements that are both disproportionate to risk and that make mortgage activities too costly for banks to engage," Bowman said in a previous appearance
Bob Broeksmit, president and CEO of the Mortgage Bankers Association, said banks would reassess their mortgage strategies if capital changes are enacted.
"Each bank has its own unique set of circumstances, but I can guarantee you that many will reassess their role in both originating and holding loans on balance sheets," Broeksmit said. "If these capital improvements get enacted, they will step up their presence."
But Ron Haynie, senior vice president of mortgage policy at the Independent Community Bankers of America, said capital relief alone would help — but not solve — banks' broader challenges in the market.
"Everybody's looking for that one magic bullet," Haynie said. "There's no one magic bullet here. A series of changes since the financial crisis have made it more difficult for community banks to be in the mortgage business."
'It's no one thing'
Beyond capital requirements, bankers say other regulatory burdens make mortgage origination and servicing costly and complex. Memories of punitive actions tied to pre-2008 lending practices — which cost banks billions — also remain fresh.
Rules enforced by the Consumer Financial Protection Bureau, including reporting requirements under TILA, RESPA and HMDA, are frequently cited as serious regulatory barriers to banks' reentry into the market.
"It's no one thing — [it's] the combination of everything," said Haynie. "If we could get some relief on some of the CFPB mortgage rules that would be helpful. A prime example is [TILA-RESPA Integrated Disclosure, or TRID]. The concept was good, but those disclosures and the rules around them make it extremely prescriptive. … You have to spend a lot of time making sure you get everything right, and that costs money."
Bowman acknowledged in Senate Banking Committee testimony on Feb. 26 that factors beyond capital requirements are limiting banks' participation.
"CFPB regulations … put onerous requirements and large fines on banks for making mistakes in mortgage applications and things like that," Bowman said
Broeksmit said the industry has worked with regulators to clarify enforcement standards, but "some of the banks have long memories."
"Burn me once, shame on you. Burn me twice, shame on me," he added.
Keep up with the competition
While banks pulled back, independent mortgage banks expanded their footprint in residential home mortgages aggressively.
"When big banks fled frontline origination after 2008, independent mortgage banks didn't just step in — they built an entire modern infrastructure for FHA, VA and first-time homebuyers," said Paul Hindman, managing director at Grid Origination Services.
IMBs have invested heavily in technology and operations, allowing them to operate with leaner cost structures and adapt quickly to interest rate swings, said Tim Rood, CEO of consulting firm Impact Capital DC. He added that compressed margins may limit how aggressively banks return, even if capital requirements are eased.
"Banks have 1,000 reasons to be in the mortgage business, but a lot has changed in the competitive environment," Rood said. "IMBs have been growing and vertically integrating. They've made steady investments in technology, operations and customer service."
Industry participants say any expansion into the mortgage space would likely focus on jumbo and other nonconforming loans where banks may have funding advantages.
Unlike government-backed lending, jumbo mortgages typically remain on bank balance sheets and can deepen relationships with affluent borrowers. That dynamic may make the segment more attractive to banks seeking cross-selling opportunities rather than pure origination volume.
But there is a public interest rationale for figuring out how to get banks back into mortgage lending. Bisanz said a broader mix of participants will offer systemic benefits.
"When you have more participants, the system becomes more resilient and there's less concentration of risk," he said. "From a competitiveness and product availability standpoint, there's an argument for having more players in the market."
