FinTech mortgage lenders solving or exploiting a friction? evidence on risk layering and prepayment risk of conforming loans

Abstract

Fintech mortgage lenders have become an increasingly important source of mortgage credit in the US. Using loan-level data on mortgages sold to Fannie Mae and Freddie Mac (GSEs), I find that compared to traditional lenders, Fintech lenders are more likely to address credit demand from low credit score borrowers. However, they may be able to exploit two frictions in the GSEs' pricing and securitization setup. First, Fintech loans tend to have more risk layers conditional on paying the same guarantee fee, which are charged 15 basis points less of interest rate but translate to 0.5% higher delinquency rate ex-post. Second, Fintech loans get prepaid more often (11%). They get cross-subsidies in the to-be-announced mortgage-backed-securities market since these loans are pooled together with low prepayment risk loans in the same contract.