The Rise of Non-Banks in Servicing Household Debt

Abstract

Over the past two decades, the mortgage industry has been transformed from the traditional bank-centered deposit taking, lending, and servicing model to a fragmented market with high non-bank participation. We document a novel mechanism for this unbundling - mortgage servicing transfers - and study the role of bank regulation in transforming servicing. Using a near universe of consumer credit records, we show that banks increase transfers of mortgage servicing rights (MSRs) to non-banks following the announcement of Basel III's higher regulatory costs of holding MSR assets for banks. Based on predictions of a simple model of servicing transfers, we demonstrate which types of banks and loans experience the highest transfer rates. We find that banks selectively transferred below-median income, subprime, and 60+ day delinquent MSRs to non-banks. Loans subject to transfer due to regulatory pressure experienced more foreclosures and personal bankruptcies. Our results suggest that growth in the unbundling of mortgage servicing increased existing disparities in financial risks across households.

Keywords: Non-Banks, Mortgage Servicing Rights, Basel III

JEL Classification: G20, G21, G23