The Rise of Non-Banks in Servicing Household Debt

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.

About the Law and Economics Workshop

Michigan's Law and Economics Workshop provides an opportunity for faculty and students from across the University to engage with cutting-edge law and economics research by leading scholars on a wide range of legal and policy topics.

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