I do not doubt that members of congress, the administration and regulators had and have every intention of protecting the financial system of this country as they have enacted legislation over the last three years. The results however, have and continue to have staggering effects on access to capital for the current or would be American homeowner.
The number of banks, non-banks and loan brokers whose risky lending practices caused them to leave the mortgage banking business may be warranted, but the continued piling on of legislation, over-burdensome regulatory requirements and increased costs have had deleterious effects—the likes of which have never been seen. Forcing consumers to wait 10 days to close a loan, forced homebuyer counseling, proposing two appraisals for every loan, different documentation requirements for a 30-year fixed rate mortgage in every state and county of the Union may make good sound bites in a news conference, but in real life they make an already confusing process an absolute nightmare to the consumer pursuing the American Dream. By far, the most important institutions responsible for providing home loans to first-time homebuyers, veterans and working class Americans in this country are community banks.
Community banks are the educators, the neighbors and the safe and sound lenders that know their customer and can most closely evaluate individual risk and provide opportunity for those seeking a better opportunity and better life. Those community banks that have survived the economic devastation of the last three years are the strong survivors that need and have earned the support of the communities they serve. It is time to say stop, wait, listen and learn to the rules makers. The worst of these new guidelines are proposed changes in capital requirements and risk weighting for community banks—specifically, Basel III.
Basel III is designed to level the playing field among major banking institutions that operate internationally. Force-feeding these same rules to community banks in the United States is unnecessary and in fact counter-productive, particularly in the current economic environment. Putting aside the huge operational costs of compliance, the new rules for calculating risk-weighted assets will have a particularly dramatic impact on the capital needed to support a mortgage-banking platform.
Not only will popular mortgage products originated by most banks attract significantly higher capital charges, the risk-based capital penalties for providing early payment default protection may force these banks away from the correspondent lending market. This will translate to less mortgage credit for Americans, particularly those in communities served by community banks. The timing could not be worse.
Essentially removing the one line of Basel III, the one that notes capital requirements for loans held for sale on the balance sheet, would eliminate much of the devastating effects of it. If elements of Basel III must be forced upon community banks, then apply some of the Basel III changes to the amount and type of capital that qualifies. Specifically, change the numerator of the risk-based capital requirements, but don’t change the way that community banks calculate risk-weighted assets—through the denominator, especially for residential mortgage loans, the lifeblood of our local communities.