Jon Decker: Will Trump give wannabe homebuyers the relief they need?

It is a common refrain among young Americans that they feel priced out of the housing market and have begun to question if homeownership is even attainable.

There is no single cause, but it doesn't help that, in recent years, banks have mostly exited the mortgage business.

Federal Reserve Vice Chair for Supervision Michelle Bowman argues this was a result of federal policies and could be reversed by her proposed reforms to capital requirements. Her reforms would be intended to revive this business at the banks and make mortgages the anchor of banking relationships (as they were historically.)

It's an attractive vision that, unfortunately, could be undermined by a surcharge in her proposal that could keep the biggest banks on the sidelines.

In 2013, the Federal Reserve adopted its initial "Basel III" framework, which imposed deduction caps that effectively limited the mortgage portfolios held by banks, and a 250% risk-based capital charge on the mortgage assets they did hold. This reaction to the 2008 financial crisis was supposed to avoid another housing crisis, but in practice it just pushed most mortgage finance out of the banking system to non-banks like Quicken Loans and PennyMac.

In 2023, the Fed proposed making these capital requirements even more stringent in a "Basel III Endgame" proposal – not just on mortgages but across the board – which would have undermined the competitiveness of U.S. banks globally and raised the cost of capital throughout the economy. That proposal, mercifully, ended with Trump's 2024 election victory and his swift demotion of its architect, Michael Barr, and elevation of Bowman to the Feds top regulatory role.

Bowman voted against the 2023 proposal framework, and at a recent conference for the American Bankers Association explained:

"In 2008, banks originated around 60 percent of mortgages and held the servicing rights on about 95 percent of mortgage balances. Since that time, the contraction has been extraordinary. As of 2023, banks originated only 35 percent of mortgages and serviced about 45 percent of mortgage balances… In part, this results from over calibration of the capital treatment for these activities, resulting in requirements that are both disproportionate to risk and that make mortgage activities too costly for banks to engage."

Under Bowman, the new Endgame proposal corrects, rather than exacerbating, the worst excesses of the 2013 rule and explicitly eliminates new penalties and fees for mortgages and consumer lending found in the previous draft. It also adopts some more market-oriented reforms used for calculating capital buffers and reforms duplicative – and costly – stress testing.

These policy changes all stand to increase the availability and affordability of mortgages. Unfortunately, there is one area of Governor Bowman's proposal that cuts the other way and should be fixed. That is the treatment of the biggest banks, the so-called Global Systemically Important Banks. Due to the size of these institutions, regulators have long subjected them to an additional "surcharge," an extra layer of capital they must set aside on top of standard requirements. The new Endgame proposal relies on a formula that Banking Dive has reported "would require the lender to hold as much as 50% more capital across most loans to consumers and businesses compared to a large non-GSIB bank for the same loans."

This means that for the exact same mortgage, a big bank would be forced to maintain a significantly larger capital cushion than its smaller competitors, creating a massive pricing disadvantage. It's unclear how or why this provision was included, but if the goal is to bring the banks back into the mortgage business, there is no logic to not including the biggest players.

With this simple fix, the Fed could accomplish an endgame that rationalizes capital rules, enhances stability, makes the U.S. more competitive internationally, and, crucially, makes housing finance more competitive and therefore housing more affordable.

Jon Decker is the executive director of American Commitment and a senior fellow at the Parkview Institute.