The Federal Reserve is preparing to loosen certain bank capital requirements in an effort to encourage more mortgage lending, signaling a potential shift in regulatory policy aimed at increasing credit availability for U.S. homebuyers.

Federal Reserve Vice Chair for Supervision Michelle Bowman outlined the proposed changes during a speech, saying the reforms are designed to strengthen incentives for banks to originate and service mortgages. The move comes as policymakers seek to address the growing dominance of non-bank lenders in the housing finance market.

Officials argue that adjustments to capital rules could help restore banks’ participation in mortgage lending without compromising financial stability.

Fed targets regulatory changes to revive bank mortgage activity

Bowman said the central bank plans to pursue two key regulatory adjustments intended to make mortgage lending more attractive for traditional banks. According to her remarks, the changes aim to reverse a long-term shift in which mortgage activity has migrated away from regulated banks toward specialized financial companies.

The proposals represent one of the clearest indications yet that regulators are reconsidering aspects of the Basel capital framework, which was strengthened after the global financial crisis to reduce risk across the banking system.

Officials within the Trump administration have criticized existing capital standards, arguing that overly restrictive rules have pushed lending into less regulated parts of the financial sector.

Banks’ share of the mortgage market has declined sharply

Bowman noted that banks’ share of U.S. mortgage originations has dropped significantly over the past decade. Traditional lenders accounted for roughly 60% of home loan originations in 2008 but only about 35% by 2023, reflecting the rapid rise of non-bank mortgage companies such as Rocket Mortgage and CrossCountry Mortgage.

Many analysts attribute this shift to regulatory costs and capital requirements introduced after the financial crisis, which made certain mortgage-related activities less attractive for banks compared with independent lenders.

Treasury Secretary Scott Bessent has echoed these concerns, stating that modernization of the capital framework should reduce incentives for lending to migrate outside the regulated banking system.

Changes to mortgage servicing rights and risk weighting under review

One major area of focus involves the treatment of mortgage servicing rights, assets that allow banks to collect fees for managing loans even after they sell them to government-sponsored entities such as Fannie Mae and Freddie Mac.

Under rules introduced in 2013, these assets have faced stringent capital treatment, including requirements that banks deduct them from regulatory capital and apply high risk weightings when calculating overall risk exposure.

Bowman said the Federal Reserve is considering removing the deduction requirement and reviewing the current 250% risk weighting applied to these assets. Regulators are also exploring whether capital requirements for mortgages should vary based on loan-to-value ratios, a practice used in several international markets.

Balancing lending growth with financial stability

Supporters of the proposed reforms argue that encouraging banks to re-enter the mortgage market could increase competition, stabilize loan servicing, and strengthen relationships between lenders and borrowers.

Bowman emphasized that the goal is not to weaken safeguards but to recalibrate requirements that may have become disproportionate to actual risk. She said strengthening bank participation in mortgage origination and servicing could coexist with maintaining the safety and soundness of the financial system.

The proposals are expected to move into a consultation phase, where regulators will gather feedback from banks, industry groups, and policymakers before finalizing any rule changes.

As housing affordability and credit access remain central economic concerns, the Federal Reserve’s approach to capital regulation may play a significant role in shaping the future direction of the U.S. mortgage market.