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Nonbanks and Mortgage Securitization

Author

Listed:
  • You Suk Kim

    (Federal Reserve Board, Washington, DC)

  • Karen Pence

    (Federal Reserve Board, Washington, DC)

  • Richard Stanton

    (Haas School of Business, University of California, Berkeley, California, USA)

  • Johan Walden

    (Haas School of Business, University of California, Berkeley, California, USA)

  • Nancy Wallace

    (Haas School of Business, University of California, Berkeley, California, USA)

Abstract

This article reviews the dramatic growth of nonbank mortgage lending after the Global Financial Crisis, especially to borrowers with lower credit scores, and the related importance of mortgage-backed securitization. Our literature review suggests that the existing theoretical and empirical work on securitization is more relevant to bank than to nonbank lenders, thus leaving outstanding questions as to why nonbank market shares have increased to their current levels and how best to structure nonbank oversight. To highlight key differences in the mortgage-lending incentives of banks and nonbanks, we build a simple theoretical model of bank versus nonbank mortgage lending and use it to generate and test empirical hypotheses. We find, in particular, that loans issued by nonbanks are more likely to prepay early than loans issued by banks, the difference not explainable by nonbank borrowers prepaying more rationally. Using regulatory filings from nonbanks that are typically unavailable to academic researchers, we examine the balance sheets and liquidity and capital positions of large Ginnie Mae nonbank servicers, which face and pose more risk in the current mortgage system. We find that on average these servicers have reasonable liquidity and capital positions relative to standard regulatory thresholds, particularly in 2022:Q1 after a few quarters of elevated profits. However, some large Ginnie Mae servicers appear to have inadequate capital, as gauged by risk-based capital measures. If defaults rise on a large scale, the liquidity and capital positions of these servicers may amplify the disruption in the mortgage and housing markets.

Suggested Citation

  • You Suk Kim & Karen Pence & Richard Stanton & Johan Walden & Nancy Wallace, 2022. "Nonbanks and Mortgage Securitization," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 137-166, November.
  • Handle: RePEc:anr:refeco:v:14:y:2022:p:137-166
    DOI: 10.1146/annurev-financial-111620-025204
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    Citations

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    Cited by:

    1. Claudia M. Buch & Linda S. Goldberg, 2024. "International Banking and Nonbank Financial Intermediation: Global Liquidity, Regulation, and Implications," Staff Reports 1091, Federal Reserve Bank of New York.

    More about this item

    Keywords

    financial regulation; mortgage prepayment; nonbank financial institutions; securitization; systemic risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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