On March 19, 2026, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation released three Notices of Proposed Rulemaking to revise bank capital requirements. A stated rationale was clear: lighter capital rules would coax banks back into the mortgage market, helping more Americans buy homes. It is a compelling story. It is also, according to an overwhelming and bipartisan chorus of academics, ratings agencies, bank analysts, and even the mortgage industry’s own trade group, almost certainly wrong. And I said this at the House Committee on Financial Services hearing “Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities.” I also detailed my analysis in my written testimony.
The Mortgage Argument, Examined
The most frequently cited consumer benefit of the Basel III Notices for Proposed Rulemaking NPRs is a revival of bank mortgage lending. The argument goes: lower capital requirements reduce the cost banks incur when originating and holding mortgages, making the business more attractive and the loans cheaper. There is a kernel of truth buried in this logic — but only a kernel.
The most structurally significant mortgage-related change is the elimination of the MSA capital deduction threshold. Under the current rule, mortgage servicing assets (MSAs) that exceed 25% of a bank’s Common Equity Tier 1 (CET1) must be deducted dollar-for-dollar from capital. That deduction has long functioned as a hidden tax on mortgage origination: when a bank sells a mortgage into the secondary market while retaining servicing rights, a large MSA position forces it to hold extra capital or curtail origination. The NPRs would replace that deduction with a uniform 250% risk weight, removing the structural ceiling on MSA growth.
The NPRs also introduce more granular loan-to-value (LTV)-based risk weights for residential mortgages, replacing the current blunt 50% standard. Lower-LTV loans — the safest conventional mortgages — would see lower risk weights and greater bank incentive to originate. However, higher-LTV loans, typically made to first-time homebuyers and lower-income borrowers with smaller down payments, could face higher risk weights under the new framework, potentially making them less attractive for banks to hold.
This is a double-edged change that will benefit prime borrowers and disadvantage exactly the borrowers the administration most wants banks to serve.
Why Virtually Every Expert Is Skeptical
Rarely does a regulatory proposal produce such unified skepticism across ideological and institutional lines. The table below summarizes the assessments of academics, ratings agencies, law firms, and market practitioners — many of whom would stand to benefit from a genuine mortgage revival.
The Real Reason Banks Left Mortgages — And Why Capital Rules Won’t Bring Them Back
Academics, independent analysts, and practitioners who have examined these proposals have identified three structural reasons why capital relief alone cannot reverse the two-decade retreat of banks from mortgage lending.
First, institutional capacity has been permanently dismantled. Banks have spent over a decade closing servicing platforms, laying off loan officers, and shedding the institutional knowledge required to operate at scale in the mortgage business. Capital rule changes do not reconstruct technology platforms, rebuild servicing operations, or recreate human expertise. Agile smaller banks might adapt at the margin, but the largest institutions are not positioned to reverse course simply because a capital rule changes.
Second, non-capital regulatory barriers remain entirely untouched. Fair Lending exposure, False Claims Act liability for FHA loans, CFPB servicing rules, and reputation risk are unchanged by the Basel NPRs. These are the constraints that bank executives and general counsel most frequently cite when explaining why they exited the mortgage business in the first place. Phillip Basil of Better Markets has correctly argued that banks have been retreating from mortgage lending for decades under existing capital rules — which directly undermines the premise that capital regulation is the primary driver, and therefore that loosening capital rules will reverse the trend.
Third, the supply-side solution does not match the demand-side problem. As financial commentator Helaine Olen has pointed out, there is no large pool of untapped qualified borrowers waiting for loans at current mortgage rates and home prices. Without strong demand, supply-side rule changes alone cannot meaningfully increase lending volumes. Lowering bank capital requirements does not build more affordable housing, reduce mortgage rates, or improve household balance sheets.
Nonbank mortgage lenders — companies like Rocket Mortgage, United Wholesale Mortgage, and Pennymac — have spent the past decade and a half investing in technology, scale, and operational expertise specifically calibrated for high-volume mortgage origination. The idea that banks can simply flip a switch and compete with these operations because their capital requirements fell by a few percentage points is, in the words of one industry insider, a fundamental misreading of how the market works.
What Is Actually at Stake
This is not a technical disagreement about model calibration. It is a question of who bears the cost when the next crisis arrives.
The statistician W. Edwards Deming once said, ‘In God we trust; all others bring data.’ The data on whether these NPRs will bring banks back to the mortgage market are, by now, unambiguous. From the president of the Mortgage Bankers Association to the analysts at KBW to the head of consumer lending at Bank of America, the verdict is the same: do not expect a sea change. The promises of a mortgage revival are not backed by evidence. The risks of weaker buffers are.
Congressional Testimonies By This Author
Prioritizing Main Street: Evaluating the Impact of Capital Proposals on Economic Growth and American Communities
Strengthening Accountability at the Federal Reserve: Lessons and Opportunities for Reform
A Holistic Review of Regulators: Regulatory Overreach and Economic Consequences
Addressing Climate as a Systemic Risk: The Need to Build Resilience within Our Banking and Financial System
