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The role of technology in mortgage lending

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Abstract

Technology-based (“FinTech”) lenders increased their market share of U.S. mortgage lending from 2 percent to 8 percent from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20 percent faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.

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  • Fuster, Andreas & Plosser, Matthew & Schnabl, Philipp & Vickery, James, 2018. "The role of technology in mortgage lending," Staff Reports 836, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:836
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    1. Stephanie Johnson & John Mondragon & Anthony DeFusco, 2017. "Regulating Household Leverage," 2017 Meeting Papers 327, Society for Economic Dynamics.
    2. Laibson, David I. & Agarwal, Sumit & Driscoll, John C. & Gabaix, Xavier, 2009. "The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation," Scholarly Articles 4554335, Harvard University Department of Economics.
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    9. Mayer, Chris & Piskorski, Tomasz & Tchistyi, Alexei, 2013. "The inefficiency of refinancing: Why prepayment penalties are good for risky borrowers," Journal of Financial Economics, Elsevier, vol. 107(3), pages 694-714.
    10. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
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    1. repec:bis:bisqtr:1809e is not listed on IDEAS
    2. Fuster, Andreas & Plosser, Matthew & Vickery, James, 2018. "Does CFPB oversight crimp credit?," Staff Reports 857, Federal Reserve Bank of New York.
    3. repec:eee:jfinec:v:130:y:2018:i:3:p:453-483 is not listed on IDEAS
    4. Jon Frost & Leonardo Gambacorta & Yi Huang & Hyun Song Shin & Pablo Zbinden, 2019. "BigTech and the changing structure of financial intermediation," BIS Working Papers 779, Bank for International Settlements.
    5. Rustom M. Irani & Rajkamal Iyer & Ralf R. Meisenzahl & José-Luis Peydró, 2018. "The rise of shadow banking: evidence from capital regulation," Economics Working Papers 1652, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Foote, Christopher L. & Loewenstein, Lara & Willen, Paul S., 2018. "Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015," Working Papers (Old Series) 1816, Federal Reserve Bank of Cleveland.
    7. Eichenbaum, Martin & Rebelo, Sérgio & Wong, Arlene, 2018. "State Dependent Effects of Monetary Policy: the Refinancing Channel," CEPR Discussion Papers 13223, C.E.P.R. Discussion Papers.
    8. repec:bin:bpeajo:v:49:y:2019:i:2018-01:p:347-428 is not listed on IDEAS
    9. repec:oup:rfinst:v:32:y:2019:i:5:p:1647-1661. is not listed on IDEAS
    10. Wang, J. Christina, 2018. "Technology, the nature of information, and fintech marketplace lending," Current Policy Perspectives 18-3, Federal Reserve Bank of Boston.
    11. Frame, W. Scott & Wall, Larry D. & White, Lawrence J., 2018. "Technological Change and Financial Innovation in Banking: Some Implications for Fintech," FRB Atlanta Working Paper 2018-11, Federal Reserve Bank of Atlanta.
    12. You Suk Kim & Steven M. Laufer & Karen Pence & Richard Stanton & Nancy Wallace, 2018. "Liquidity Crises in the Mortgage Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(1 (Spring), pages 347-428.
    13. Tobias Berg & Valentin Burg & Ana Gombović & Manju Puri, 2018. "On the Rise of FinTechs – Credit Scoring using Digital Footprints," NBER Working Papers 24551, National Bureau of Economic Research, Inc.
    14. Buchak, Greg & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2018. "Fintech, regulatory arbitrage, and the rise of shadow banks," Journal of Financial Economics, Elsevier, vol. 130(3), pages 453-483.
    15. Martin Brown & Jan Schmitz & Christian Zehnder, 2018. "Communication and Hidden Action: Evidence from a Person-to-Person Lending Experiment," Working Papers on Finance 1819, University of St. Gallen, School of Finance, revised Nov 2018.

    More about this item

    Keywords

    mortgage; technology; prepayments; nonbanks;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • 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

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