As anticipated as recently as yesterday, the next round of U.S. end-game capital proposals will include a significant win for bankers when it comes to residential mortgage origination. Where it comes out on other key mortgage topics is, though, yet to be revealed….
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A new FRB-NY study confirms that 83% of loans from 2000-2022 went to first-time homebuyers, compared to 56% for the GSEs and 57% for private lenders. FHA loans of course have very high LTVs and low scores, with scores improving after 2008 when the PLS market stopped adversely selected FHA even though over half of FHA loans still have scores under 680. FHA sustainability has varied based on these and other factors, but 21.8% of borrowers from 2011-2016 still lost their homes.
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In this report, we proceed from our assessment of the proposed regulatory capital framework to an analysis of the rules governing credit risk. In addition to eliminating the advanced approach, the proposal imposes higher standards for some assets than under the old standardized approach (SA) via new “expanded” requirements. As detailed here, many expanded risk weightings are higher than current requirements either due to specific risk-weighted assessments (RWAs) or definitions and additional restrictions. This contributes to the added capital costs identified by the banking agencies in their impact assessment, suggesting that lower risk weightings in the expanded approach reflected the reduced risks described in the proposal for other assets and will ultimately have little bearing on regulatory-capital requirements and thus ….
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We’ve much more to do to determine the strategic and policy impact of the new credit-, market-, and operational-risk capital rules singly and collectively – a complex task given the 1,089-page rulemaking made harder by some extremely-arcane language that may either mask what the agencies mean or differ from what they meant to mean. Still, several conclusions about mortgage finance are clear: the rules would be less demanding than those at present for many mid-LTV loans, the GSEs’ risk weighting continue to give them a considerable advantage over bank originators and securitizes, and MI lost the limited luster the banking agencies were forced to concede in 2013.
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