What Drives Screening Incentives in Non-bank Mortgage Originators?

Abstract

Non-bank mortgage originators, which operate through the originate-to-distribute (OTD) model, account for more than half of all the mortgage origination in the U.S. However, less is known about which factors drive the quality of mortgage originations through non-banks. I show that an exogenous shock that reduced collateral risk for funding intermediaries of non-bank mortgage originators led to a greater issuance of riskier mortgages that culminated in 10--30% higher ex post defaults. These results show how the quality of mortgage origination in the OTD model of non-banks is affected by the collateral risk borne by their funding intermediaries. Overall, the results highlight funding intermediaries' monitoring incentives as one of the factors that drive the quality of mortgage originations through non-banks.

Keywords: Non-bank mortgage originators; Mortgage companies; Warehouse financing

JEL Classification: G21, G23, G28