On June 7, 2012, the Federal Reserve Board of Governors unanimously approved the release of three Notices of Proposed Rulemaking (NPRs) for Basel III and the final rule for Basel 2.5.
Under the proposal, the approach for calculating risk weighted assets would also change the treatment of residential mortgages, making it more risk-sensitive. Under the NFP, residential mortgages are divided into two categories and the risk weights would depend heavily on LTV and would range from 35%-200%.
The new proposed capital rule does not recognize PMI for determining the capital required for residential mortgages. Therefore, a first time home buyer who can come up with 5% cash and obtains mortgage insurance for 20% of the loan will be considered as having a 95% loan for capital purposes resulting in a more expensive loan.
There is also concern that the measure is not appropriately calibrated and could lead to disproportionately higher borrowing costs for commercial real estate borrowers. Setting excessive capital requirements will limit the availability of funds that support new investments and job creation – particularly for commercial real estate.
NAR is currently reviewing the measure and its potential impact on commercial and residential real estate credit capacity. We are already working with a number of industry groups to develop consensus viewpoints in an effort to begin raising concerns about the economic consequences of proposed rules in advance of the comment deadline.