The banks will simply exit loans that don't hit their targeted return requirements, including underwriting less 30 year Fixed Rate Mortgage's for American Families.
Typically less competition equals higher prices (a concept your beloved party consistently fails to appreciate ;-) ! )
Worse case scenario: We have another 2008-2011 30% drop in US Housing Prices, with almost all the 30 year Fixed Rate Mortgages underwritten by nonbanks holding razor thin Capital who are unable to buy back Mortgages underwritten in Violation of their Representations and Warranties to the GSES.
Unlike the GSE'S (who are barred from any sort of Lobbying for their own best interests on the Hill pursuant to HERA and the Government's defacto Nationalization), the TBTF banks aren't taking higher Capital Ratio Requirements lying down.
The TBTF banks are doing a full court press Lobbying campaign to soften or eliminate the blow of higher Capital Ratios under Basel III:
"The Proposed Rule The U.S. agencies’ proposed rule sets capital requirements for mortgage loans using a standardized approach that is empirically unsupported and demonstrably punitive to U.S. mortgage borrowers. For credit risk, the agencies propose to use the same risk segments as Basel but would arbitrarily add 20 percentage points to each risk segment. This means the proposal would increase the risk weight for high loan-to-value (LTV), first-lien mortgages (with LTVs over 80 percent) well beyond the 50-percent risk weight applicable under the current standardized approach.
Banks would also encounter another capital charge for operational risk. This would significantly elevate the total risk weight for mortgages sold to the GSEs, as we outline below.
Moreover, banks would face a substantial stress capital buffer charge for all mortgage exposures, given the large fall in home prices assumed in the stress tests and the inclusion of the stress tests’ operational risk losses on top of the existing standard operational risk charge.
Finally, banks operating in the United States are not allowed to use internally modeled approaches for determining risk-weighted assets, which are permitted in other jurisdictions subject to a floor of 72.5 percent of risk-weighted assets under the standardized approach. So, uniquely for U.S. banks, there would be no escape from punitive standardized charges, regardless of whether these are demonstrably excessive in relation to historical losses."
2008 wouldn’t have happened if they just left FnF alone and kept the banks out of the Mortgage backed securities game, or made them follow FnF exact model. FnF are full capitalize to weather any financial correction.
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