Investing in the Shadows: FinTech Growth and Mortgage Market Dynamics

The adoption of new technologies is widely viewed as a key driver of the rapid growth of nonbanks in the U.S. mortgage market after the Global Financial Crisis (GFC). This paper studies technology investment by mortgage lenders and its implications for post-GFC market structure. Using a new dataset on lender-level technology investment merged with loan origination records and balance-sheet information, we document that technology-related human capital investment has risen over time, driven disproportionately by banks and larger lenders, and that such investment predicts higher subsequent productivity. We then estimate lenders’ investment responses to two major shocks: the expansion of FinTech lending and monetary policy-driven demand shocks. Our instrumental-variable estimates suggest that banks increase technology investment in response to FinTech growth, whereas nonbanks respond weakly or even negatively; in contrast, nonbanks respond more strongly to positive demand shocks. To quantify the relative contributions of these shocks to changes in market structure, we build a heterogeneous-firm model consistent with the empirical evidence. The model implies that the post-GFC nonbank expansion was largely driven by a combination of favorable shocks—strong demand and tighter bank regulation—rather than broad-based technological advantages among nonbanks. Consequently, in a prolonged high-interest-rate environment with relaxed bank regulation, as may characterize the post-2025 policy environment, the model predicts a decline, rather than continued growth, in nonbanks’ market share.