Deep Dive: Capital and Liquidity Alignment for Smaller Banks (President Trump’s Executive Order on Mortgage Credit Discussion - Part Two)
As part of The Commonwealth Group’s series of posts on the March 13, 2026 Executive Order – “Promoting Access to Mortgage Credit (Federal Register :: Promoting Access to Mortgage Credit) – today’s post is a look at the capital and liquidity changes that are part of the order.
(See our blog post Breaking Down the New "Promoting Access to Mortgage Credit" Executive Order - The Commonwealth Group for a general discussion of the Executive Order)
While the Executive Order is still being digested by the mortgage lending community, it is already clear that the order represents some of the most impactful changes to mortgage lenders and community banks in decades (MBA Statement on President Donald Trump’s Executive Orders on Housing | MBA).
The Executive Order does not just cut "red tape" in the loan application process; it takes a direct aim at the balance sheets of community and smaller banks. Section 4 of the order, Capital, and Liquidity Alignment is perhaps the most technical—and important—portion for mortgage lenders, bank leadership, and investors.
Here is how the administration is directing regulators to rethink capital requirements to get money flowing back into the housing market:
1. Tailored Risk Weights
Current regulations often treat various mortgage assets with a "one-size-fits-all" risk weight, which can lead to inefficient capital allocation. The order directs the Federal Reserve, FDIC, OCC, and NCUA to consider:
Portfolio Mortgages: Revising risk weights for loans that banks keep on their own books rather than selling to the secondary market.
Servicing Rights: Adjusting the capital treatment of mortgage servicing rights (MSRs) to better reflect actual material credit risk.
Warehouse Lines of Credit: Tailoring risk weights for the lines of credit banks provide to other mortgage originators.
2. Modernizing Liquidity Access
To ensure that smaller banks have the "ammunition" to lend, the order seeks to bridge the gap between community banks and broader liquidity sources:
FHLB and Fed Integration: The order pushes for modernizing collateral valuation and transfer systems between the Federal Reserve and Federal Home Loan Banks (FHLBs).
The Discount Window: Regulators are instructed to consider authorizing FHLBs' intermediate access to the Federal Reserve’s discount window for member institutions under standardized protocols.
Long-Dated Advances: There is a specific call to expand access to longer-term FHLB advances specifically tied to residential mortgage assets.
3. Targeted Liquidity Programs
The administration wants the FHLBs to be more than just a general liquidity backstop. The order directs the creation of targeted programs for:
Entry-Level Housing: Specific liquidity support for loans aimed at first-time homebuyers.
Small Residential Builders: Providing the necessary capital for smaller-scale construction projects that often struggle to find funding from larger "money center" banks.
Owner-Occupied Purchase Loans: Prioritizing capital for those moving into the homes they buy.
The Commonwealth Group Takeaway
For the last decade, many community banks have felt "capital-trapped"—holding more capital than necessary for low-risk portfolio loans because of rigid regulatory formulas. While this has directly affected community banks, it has had a trickle-down impact on independent mortgage bankers, builders, and borrowers. By pushing for risk weights that match material risk, this order could effectively "unlock" significant lending capacity without requiring banks to raise a single dollar of new equity.
At The Commonwealth Group, we view these changes as a significant opportunity for independent mortgage bankers and community banks to reclaim their role as the primary engine of local housing markets. For more information on the suite of services offered by The Commonwealth Group, contact Martin Luplow at [email protected] .
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