The Rise of Nonbanks and the Quality of Post-Origination Mortgage Servicing

Abstract

We find that as nonbanks' market share increases in a local residential mortgage market, the quality of their post-origination mortgage servicing improves. Two instrumental variable analyses exploiting (1) stress tests conducted by the Federal Reserve, and (2) mortgage industry surety bonds required by each state confirm this finding. Evidence suggests that the quality improvement is likely due to nonbanks' increased specialization in servicing lower-income borrowers and investment in technology. Furthermore, consistent with the lender specialization explanation, we find that as nonbanks' market share increases, traditional banks increasingly service higher-income borrowers and their servicing quality improves as well.

Keywords: Mortgage servicing, Quality of financial services, Nonbanks

JEL Classification: G21, G23, L13, L15