The Federal Reserve doesn’t just manage interest rates. It regulates banks, too. And on Monday, a top Fed official said the central bank is rethinking some regulations around mortgages, which might just make mortgages slightly easier to get.
After the 2008 housing market crash, banks bolted out of the mortgage business.
“Before the Great Recession, about 70% of loans were originated by banks. Now it’s only about 30%,” said Tomasz Piskorski, a professor of finance at Columbia Business School.
One reason banks pulled back was they were burned so badly by the home loans they made in the leadup to the Recession. Another reason, according to Piskorski’s research? Regulation drove them out.
“It accounts for about 60% of that migration,” he said.
Specifically, new rules said banks had to set aside a bunch of money in reserve as a kind of safety cushion, should things go bad.
A lot of banks felt it was too much money so they just didn’t want to deal with it.
“A lot of this activity has moved to the unregulated sector, to the non-banks,” Piskorski said.
Non-banks, like, fintech companies.
That’s not necessarily a problem, he said, but it does mean banks aren’t facing a ton of competition to give you a home loan. And proposed Biden-era rules would have tightened those regulations even more.
On Monday, the Fed basically said, “let’s maybe … not.” So here’s what they want to do instead:
“One, a reduction in the amount of capital that banks will have to hold against loans that they hold on their portfolio,” said Jim Parrott, a nonresident fellow at the Urban Institute and former senior advisor in the Obama White House.
Right now, banks have to hold a certain size safety cushion of capital for all their loans.
“Which is sort of a silly way to determine capital, because it means you’ve got to hold the same amount of capital against a risky loan as you would against a not-very risky loan,” Parrott said.
Some flexibility there would encourage banks to offer more mortgages.
The Fed may do a similar thing for mortgage servicing — that’s like the day to day management of mortgages and payments. Sometimes, banks will manage mortgages that were actually issued by someone else, but they have to have a safety cushion for that, too.
“We are very optimistic. They are definitely moving in the right direction,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association. “You want both banks and non-banks to be active participants in this market.”
The more entities offering mortgages the better, Fratantoni said.
