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It may come without further improvements in bond maturities.
Instead, Basel’s proposed restructuring, coupled with improved bank capital requirements, could reduce rates as banks increase their appetite for housing.
But not all borrowers would benefit equally. Those who can afford to put together large payments will see the biggest impact.
And under some models, rates can drop as much as half a point, meaning a borrower facing a rate of 6.375% today may qualify for less than 6%.
Basel Rule Changes Will Increase Banks’ Demand for Loans
It is not that private banks have long been indifferent to mortgages.
Post-GFC they never really came back. Some banks participated more than others and Wells Fargo was #1 for a short period of time.
But for the past several years, it has been about the non-banks, Rocket Mortgage being the leading mortgage lender in America before United Wholesale Mortgage took them out.
Part of the reason had to do with Basel III, where banks were required to hold more of the loans they kept on their books.
Besides getting too caught up in the weeds here, banks were cut off from making loans and keeping them as a result.
But the proposed changes could bring banks back into the mortgage game.
For example, the risk weight of a typical mortgage with a loan-to-value ratio (LTV) of 75% can drop from 50% to 30%-35%, according to the Urban Institute.
And for loans below 60% LTV, it goes from 50% to 20%-25%. These lower risk ratings can attract banks to lend again, especially at lower LTVs.
So borrowers who are able to put a down payment of 20% or more on a home purchase will be able to cut better rates on their loans.
How Low Can Mortgage Rates Go?
How low is it?
Well, it depends, but it seems too big.
The Urban Institute created a chart with the Basel Re-Proposal as it was written with a narrow and wide reading, and recommended changes.
And, without going too deep here, the impact is huge.
The average mortgage borrower can see a 30-year adjustment anywhere from 15 to 40 points lower.
For example, if your quote was 6.375% today, it is probably 5.99% because of these changes.
Assuming mortgage rates eventually return to those sub-6% levels we saw in February, you’re probably closer to 5.5%.
Even better for a borrower with a lot of home equity or a 40%+ down payment. For these people, a rate improvement of up to .50% is possible.
So again, the 6% rate drops to maybe 5.5%.
Those with jumbo loans will also benefit as the jumbo-conforming spread narrows by around 30 basis points.
In summary, the Urban Institute notes that these changes will invite “banks to compete more aggressively for common originations, particularly low-LTV financing and large mortgages.”
Notably, this won’t have much of an impact on high LTV or government-backed loans, such as FHA loans and VA loans.
In addition, borrowers with lower down payments could see higher loan prices because Fannie and Freddie would not produce lower LTV loans to offset the upfront risk.
That would reduce the cross-subsidy that makes high-LTV loans cheaper than they otherwise would be.
However, Urban proposed an improved risk rating for private mortgage insurance (PMI) loans as well, which would improve loan rates on those loans by 15 to 35 bps.
Across the mortgage world, mortgage rates may be as low as .30%. That would be a big win for home buyers who are struggling with affordability today.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 20 years ago to help prospective (and current) home buyers better navigate the mortgage process. Follow me on X for the hottest.
