Looking for mortgage rate relief?
It could come without any further improvement in bond yields.
Instead, Basel re-proposal, which boils down to improved bank capital requirements, could push rates lower as banks increase their appetite for mortgages.
But not all borrowers would benefit equally. Those who could muster large down payments would see the biggest impact.
And under certain models, rates could fall as much as a half point, meaning a borrower facing a 6.375% rate today might soon qualify for a rate below 6%.
Basel Rule Changes Will Increase Bank Appetite for Mortgages
It’s no secret banks have long been disinterested in mortgage lending.
Post-GFC they never really came back. Some banks participated more than others and Wells Fargo was #1 for a brief spell.
But over the past many years, it’s been all about the nonbanks, with Rocket Mortgage the top mortgage lender in America before United Wholesale Mortgage squeezed them out.
Part of the reason had to do with Basel III, in which banks were required to hold more capital for the loans they kept on their books.
Without getting too stuck in the weeds here, banks were disincentivized from making mortgages and keeping them as a result.
But proposed changes could get banks back in the mortgage game.
For example, the risk weight for a conventional mortgage with a 75% loan-to-value ratio (LTV) could fall from 50% to 30%-35%, per the Urban Institute.
And for a loan below 60% LTV, from 50% to 20%-25%. These lower risk weightings would entice banks to lend again, especially at lower LTVs.
So borrowers who were able to put a 20% down payment or more on a home purchase would be able to snag better pricing on their mortgage.
How Much Lower Would Mortgage Rates Be?
How much lower?
Well, it depends, but it appears to be pretty sizable.
The Urban Institute laid out a chart with the Basel Re-Proposal as drafted with narrow and broad readings, along with recommended changes.
Again, without getting too deep here, the impact is sizable.
A conventional mortgage borrower would see a 30-year fixed anywhere from 15 to 40 basis points lower.
For example, if your quote was 6.375% today, perhaps it’s 5.99% thanks to these changes.
Assuming mortgage rates eventually drift back to those sub-6% levels we saw in February, maybe you’re closer to 5.5%.
It’s even better for the borrower with lots of home equity or a 40%+ down payment. For these folks, a rate improvement of up to .50% is possible.
So again, a rate of 6% drops to maybe 5.5%.
Those with jumbo loans would also benefit as the jumbo-conforming spread narrowed as much as 30 basis points.
In a nutshell, the Urban Institute notes that the changes would invite “banks to compete more aggressively for prime conventional originations, particularly low-LTV refinances and jumbo purchase mortgages.”
Notably, this wouldn’t have as much impact on high-LTV loans or government-backed ones, such as FHA loans and VA loans.
In addition, borrowers with low down payments could see higher mortgage rates because Fannie and Freddie wouldn’t generate as many low-LTV loans to offset the risk of the former.
That would reduce the cross-subsidy that makes high-LTV loans cheaper than they otherwise would be.
However, Urban has proposed improved risk weightings for loans with private mortgage insurance (PMI) as well, which would improve mortgage rates on such loans by 15 to 35 bps.
Across the entire mortgage universe, mortgage rate pricing could be up to .30% lower. That’d be a nice win for home buyers struggling with affordability today.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 20 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
