Adverse Selection in the Market for Mortgage Servicing Rights

63 Pages Posted: 27 Nov 2017 Last revised: 5 Apr 2019

See all articles by Tom Mayock

Tom Mayock

UNC Charlotte; Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Lan Shi

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: March 8, 2019

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.

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

Suggested Citation

Mayock, Tom and Shi, Lan, Adverse Selection in the Market for Mortgage Servicing Rights (March 8, 2019). Available at SSRN: https://ssrn.com/abstract=3073805 or http://dx.doi.org/10.2139/ssrn.3073805

Tom Mayock (Contact Author)

UNC Charlotte ( email )

Charlotte, NC 28223
United States

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th St Sw
Washington, DC 20219-0001
United States

Lan Shi

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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