Adverse Selection in the Market for Mortgage Servicing Rights

Abstract

Activity in the U.S. market for mortgage servicing rights has increased in recent years. Incumbent servicers are at a significant informational advantage relative to potential buyers of these servicing rights, introducing the possibility of adverse selection. This paper marks the first investigation of adverse selection in the market for mortgage servicing rights. Using data from mortgage servicers, we find that loans with higher ex ante measures of prepayment and default risk were more likely to experience a servicing transfer. Results from an ex post analysis in which we condition on these risk measures reveals that loans that experienced a servicing transfer were more likely to prepay and default, a finding that suggests that the market for servicing rights is characterized by adverse selection.

Accepted for publication at Journal of Housing Economics

Keywords: Mortgages, Adverse Selection, Mortgage Servicing Rights, Asymmetric Information