Shadow Bank and Fintech Mortgage Securitization

Abstract

Agency MBS issuers can choose among three securitization venues: individual securitization where an issuer uses her own loans to create an MBS, collective securitization where different issuers deliver loans into a common MBS, and cash window where issuers receive immediate cash payment by selling loans to Fannie Mae or Freddie Mac, who then conduct securitization. We find that issuers with greater immediate liquidity needs (e.g., smaller issuers and shadow banks) have a larger fraction of their loans securitized through cash window. The uniform pricing feature of collective securitization results in cross-subsidy from traditional banks, who have relatively high-value loans, to shadow banks, especially fintech issuers, who have relatively low-value loans; hence, shadow banks and traditional banks prefer collective and individual securitization, respectively. We further show that securitization venues affect the quality and quantity of loans that issuers securitize, using Fannie Mae's policy shock on collective securitization and the COVID-19 shock on cash window.