Mortgage Capital Requirements: 5 Essential Changes Under Basel III Endgame

The Federal Reserve is revising Basel III Endgame rules to reshape mortgage capital requirements for US banks. Discover how these regulatory changes will impact lending, homeownership access, and your mortgage options in 2026.

The Federal Reserve is preparing to unveil significant changes to mortgage capital requirements for US banks as part of the Basel III Endgame regulatory framework. These revisions, expected in early 2026, represent a major shift in how regulators approach bank capital adequacy and mortgage lending. The changes aim to reverse years of declining bank participation in the mortgage market while maintaining financial stability. Understanding these mortgage capital requirements is essential for banks, borrowers, and financial professionals navigating the evolving regulatory landscape.

Key Takeaways

The Federal Reserve is implementing revised mortgage capital requirements to encourage bank participation in mortgage lending
New mortgage capital requirements will be roughly capital-neutral, departing from the original aggressive proposal
Changes include removing mortgage servicing rights deductions and introducing risk-sensitive weights based on l

oan-to-value ratios
These mortgage capital requirements could increase competition and improve borrower access to credit
Implementation of the revised mortgage capital requirements is expected in early 2026

Understanding Basel III and Its Evolution

The Basel III framework, developed by the Basel Committee on Banking Supervision, establishes international standards for bank capital adequacy, stress testing, and liquidity. These standards were created following the 2008 financial crisis to promote financial stability across the global banking system. The US implementation, known as Basel III Endgame, has undergone significant revisions after industry pushback over proposed capital increases.

The original proposal faced substantial criticism from the banking industry. According to the Bank Policy Institute, the initial Basel Endgame proposal could have raised capital requirements by 16-19% depending on institution size. This dramatic increase prompted regulators to reconsider their approach and develop a more balanced framework that addresses financial stability concerns without unnecessarily constraining lending.

The Basel III framework represents a comprehensive approach to banking regulation, encompassing capital ratios, liquidity standards, and leverage ratios. These regulatory tools work together to ensure banks maintain sufficient buffers to absorb losses during economic downturns. However, when applied too stringently to specific lending sectors like mortgages, these standards can have unintended consequences.

The Problem: Banks Retreating from Mortgage Lending

US banks have significantly reduced their role in the mortgage market over the past decade, with nonbanks now dominating the sector. This shift stems from over-calibrated capital rules implemented after 2013 that made mortgage lending increasingly expensive for traditional banks. The regulatory burden has pushed mortgage origination toward nonbank lenders, reducing competition in the market.

The economic impact of these restrictions is substantial. The Bank Policy Institute estimates that the original Basel Endgame proposal could reduce annual domestic output by $42 billion per percentage point increase in capital requirements. This potential economic drag prompted regulators to reconsider their approach.

Federal Reserve Vice Chair Michelle Bowman articulated the core problem in her recent remarks: "By requiring disproportionately high capital, we reduce a bank's ability to deploy capital to support the needs of their community." This statement reflects growing recognition among regulators that excessive capital requirements can harm lending availability and economic growth.

The decline in bank mortgage lending has broader implications for the financial system. When traditional banks exit the mortgage market, nonbank lenders fill the void. While nonbanks provide important lending services, they operate under different regulatory frameworks and may have different risk management practices. This shift has fundamentally altered the structure of the mortgage market and raised questions about systemic risk and consumer protection.

Proposed Changes to Mortgage Capital Requirements

The Federal Reserve is targeting specific, strategic changes to mortgage-related capital treatment. According to Bowman's announcement, the proposals would remove the requirement to deduct mortgage servicing rights (MSRs) from regulatory capital while maintaining the 250% risk weight assigned to these assets. This change recognizes that mortgage servicing rights represent valuable income streams rather than pure risk.

Additionally, regulators plan to introduce risk-sensitive weights based on loan-to-value ratios. This approach allows banks to hold less capital for lower-risk mortgages while maintaining appropriate capital buffers for riskier loans. As Bowman explained: "The proposals would remove the requirement to deduct mortgage servicing assets from regulatory capital while maintaining the 250% risk weight assigned to these assets."

These changes represent a fundamental shift in regulatory philosophy. Rather than applying uniform capital charges across all mortgages, the revised framework recognizes that mortgage risk varies significantly based on borrower equity and other factors. This more nuanced approach should encourage banks to increase mortgage lending while maintaining appropriate risk management.

The mortgage capital requirements revisions also address concerns about double-counting between different regulatory measures. The original Basel III Endgame proposal was criticized for applying capital charges that overlapped with stress testing requirements, effectively penalizing banks twice for the same risk. The revised mortgage capital requirements framework aims to eliminate this double-counting and create a more proportionate regulatory structure.

A Capital-Neutral Approach to Mortgage Capital Requirements

Unlike the original Basel III Endgame proposal, the revised framework is expected to be roughly capital-neutral overall. Capstone analysts predict that regulators will release this more balanced proposal in early 2026, which should be favorable to large and mid-sized banks. This represents a significant departure from the aggressive capital increases originally proposed.

The regulatory groundwork for these changes is already underway. In November 2025, federal agencies issued a final rule modifying enhanced supplementary leverage ratio requirements for globally systemically important banks (GSIBs). This rule reduced tier 1 capital requirements by less than 2% for affected bank holding companies, effective April 1, 2026. While modest, this change signals the direction of broader reforms to come.

Community banks may also see relief through proposed adjustments to the community bank leverage ratio threshold. Capstone DC Insights reports that regulators are considering lowering this threshold from 9% to 8%, acknowledging the different risk profiles and operational realities of community lenders compared to large institutions.

The capital-neutral approach represents a pragmatic middle ground between maintaining financial stability and promoting lending. By keeping overall capital requirements stable while reallocating them toward less restrictive treatment of mortgages, regulators hope to achieve their dual objectives. This approach also reflects lessons learned from the original Basel III Endgame proposal, which faced widespread opposition from the banking industry and policymakers concerned about economic impacts.

Implications for Banks and Borrowers

These regulatory changes could have significant positive implications for the mortgage market. By reducing capital requirements for mortgage lending, the Federal Reserve aims to restore banks' competitive position against nonbank lenders. This increased competition should benefit borrowers through lower rates, better terms, and more lending options.

For banks, the revised rules should make mortgage lending more economically viable. When capital requirements are excessive, banks rationally shift resources toward other business lines with better risk-adjusted returns. By making mortgage lending more attractive from a capital perspective, regulators hope to reverse the trend of declining bank participation in this critical market segment.

The broader economic implications are also important. Increased bank participation in mortgage lending could improve homeownership access by expanding credit availability and fostering competition. This aligns with the Federal Reserve's dual mandate of promoting maximum employment and stable prices.

Borrowers may experience several benefits from the revised mortgage capital requirements framework. First, increased bank participation in mortgage lending should expand the pool of available lenders, giving borrowers more options and potentially better terms. Second, competition between banks and nonbanks may drive down mortgage rates and fees. Third, banks' traditional underwriting standards and customer service practices may provide borrowers with additional protections and transparency.

For the broader financial system, the revised mortgage capital requirements represent an important step toward more balanced regulation. By recognizing the unique characteristics of mortgage lending and adjusting capital requirements accordingly, regulators demonstrate a commitment to evidence-based policymaking. This approach should enhance financial stability while promoting economic growth and lending.

Frequently Asked Questions About Mortgage Capital Requirements

What exactly are mortgage capital requirements?

Mortgage capital requirements are regulatory standards that specify how much capital banks must hold in reserve when they originate and hold mortgages. These requirements are designed to ensure banks can absorb losses if borrowers default. Capital requirements are expressed as percentages of risk-weighted assets, meaning different types of mortgages may have different capital requirements based on their perceived risk.

Why are mortgage capital requirements being changed?

The Federal Reserve is revising mortgage capital requirements because the current rules have discouraged banks from participating in the mortgage market. The original Basel III Endgame proposal would have significantly increased capital requirements, making mortgage lending less profitable for banks. By revising these requirements, regulators aim to restore bank participation in mortgage lending while maintaining financial stability.

How will the new mortgage capital requirements affect mortgage rates?

The revised mortgage capital requirements should make mortgage lending more attractive for banks, potentially increasing competition and lowering mortgage rates. When banks can hold less capital against mortgages, they can offer more competitive pricing. However, the actual impact on rates will depend on broader economic conditions and monetary policy.

When will the new mortgage capital requirements take effect?

The Federal Reserve is expected to release a formal proposal for the revised mortgage capital requirements in early 2026. After a public comment period, final rules would likely be implemented later in 2026 or early 2027. The November 2025 rule modifying supplementary leverage ratio requirements is already in effect as of April 1, 2026.

Will community banks be affected differently by the new mortgage capital requirements?

Yes, the revised mortgage capital requirements framework includes specific provisions for community banks. Regulators are considering lowering the community bank leverage ratio threshold from 9% to 8%, recognizing that community banks have different risk profiles and operational characteristics than large institutions. This tailored approach should provide meaningful relief for community lenders.

How do mortgage capital requirements relate to mortgage servicing rights?

Mortgage servicing rights (MSRs) are the rights to collect payments and manage loans on behalf of investors. Under current rules, banks must deduct MSRs from regulatory capital, which reduces their capital available for lending. The revised mortgage capital requirements would remove this deduction while maintaining a 250% risk weight, recognizing that MSRs represent valuable income streams rather than pure losses.

What is the difference between the original and revised mortgage capital requirements proposals?

The original Basel III Endgame proposal would have increased capital requirements by 16-19%, significantly constraining bank lending. The revised mortgage capital requirements framework is expected to be roughly capital-neutral overall, meaning it would reallocate capital requirements rather than increase them substantially. This represents a significant shift toward a more balanced regulatory approach.

Implementation Timeline and Next Steps

The financial industry is closely watching for the Federal Reserve's formal proposal expected in early 2026. These changes represent a careful balance between maintaining financial stability and promoting competitive lending markets. The revisions address industry concerns about double-counting between capital requirements and stress tests, creating a more proportionate regulatory framework that should encourage banks to increase their mortgage market participation while maintaining appropriate risk management standards.

The implementation timeline for the revised mortgage capital requirements will likely follow this sequence: First, the Federal Reserve will release a formal proposal in early 2026, which will include detailed explanations of the changes and their rationale. Second, there will be a public comment period, typically lasting 60-90 days, allowing banks, consumer advocates, and other stakeholders to provide feedback. Third, regulators will review comments and potentially revise the proposal based on feedback received. Finally, the Federal Reserve will issue final rules, which will become effective on a specified date, likely in late 2026 or early 2027.

Banks should begin preparing now for the implementation of revised mortgage capital requirements. This preparation should include reviewing current mortgage portfolios, assessing the impact of new risk-weighting methodologies, and updating systems and processes to comply with new requirements. Banks should also monitor regulatory developments closely and participate in industry associations' efforts to provide feedback on proposed rules.

Conclusion

The Federal Reserve's revisions to mortgage capital requirements represent a significant step toward more balanced banking regulation. By reducing the capital burden on mortgage lending, regulators aim to restore banks' competitive position in the mortgage market and improve homeownership access. The revised mortgage capital requirements framework reflects lessons learned from the original Basel III Endgame proposal and demonstrates regulators' commitment to evidence-based policymaking.

The implications of these changes extend beyond the banking industry. Borrowers should benefit from increased competition and potentially lower mortgage rates. The broader economy may benefit from increased lending and improved access to credit. Financial stability should be maintained through the continued application of appropriate capital standards and stress testing requirements.

As the Federal Reserve moves forward with implementing the revised mortgage capital requirements, all stakeholders should remain engaged with the regulatory process. Banks should prepare for implementation, borrowers should monitor developments that may affect their mortgage options, and policymakers should continue to seek the right balance between financial stability and economic growth. The revised mortgage capital requirements represent an important evolution in banking regulation, one that should benefit both the financial system and the broader economy.