Sep 30, 2023 - Economy

How new bank capital rules could hit Black borrowers hardest

Data: BPI; Chart: Axios Visuals
Data: BPI; Chart: Axios Visuals

New Federal Reserve rules meant to make big banks safer — the set of plans known as Basel Endgame — would make it even harder for low- and middle-income Americans, a group that includes a disproportionate number of Black Americans, to get a mortgage.

Why it matters: The Federal Reserve is being torn between two imperatives — strengthening the banking system and preserving the ability of under-served borrowers to get onto the bottom rung of the housing ladder.

The big picture: The Fed's proposals would mark some mortgages — the ones with down payments of less than 20% — as being particularly risky. Those mortgages are issued overwhelmingly to low- and middle-income borrowers.

  • Large banks would have to hold more capital against those loans, which in turn would make them more expensive for borrowers.
  • Conversely, the banks would need to hold significantly less capital against mortgages where there was a huge downpayment of 50% or more — thereby further reducing the cost of borrowing for the already wealthy.

Driving the news: A broad coalition has come together to oppose this part of the new capital requirements, including the National Housing Conference, the National Urban League, the National Community Reinvestment Coalition, the Urban Institute (which released a white paper on the subject earlier this month), and now the Bank Policy Institute, which has quantified the effect of the new standards on borrowers of different races.

By the numbers: A mortgage offered to a Black borrower would see its risk weighting rise from 50% to 61.7% on average, per the study by BPI's Paul Calem and Francisco Covas shared exclusively with Axios.

  • That means the amount of capital the bank would have to hold against that mortgage would rise by 23%.
  • For white borrowers, the rise is much smaller — just 4.8 percentage points, or 9.6%.

Zoom out: At the moment, most first-time homebuyers don't get a mortgage from a bank. Instead, they borrow from nonbanks — who are now closing up shop as demand evaporates in the face of higher interest rates.

  • The new capital rules would cause even more migration to nonbank lenders, who tend to shut their doors during recessions and who are much quicker to foreclose on delinquent borrowers, Covas tells Axios.

Where it stands: The Fed is aware of the problem, and nothing is set in stone. Michael Barr, the vice chair for supervision who's overseeing the proposal, has said that "we want to ensure that the proposal does not unduly affect mortgage lending, including mortgages to underserved borrowers."

  • A Fed economist, Chris Finger, when questioned by governor Lisa Cook on this matter in July, said that "it might be appropriate to adjust the residential mortgage treatment" in the proposal.

The bottom line: It's natural to expect the bank lobby to oppose any and all attempts to increase bank capital. In this case, however, they seem to have a point.

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