The Effect of Regulatory Oversight on Nonbank Mortgage Subsidiaries — The Journal of Real Estate Finance and Economics

Given the role that the housing market played in the financial crisis of 2007-2009, policymakers and regulators subsequently subjected mortgage lenders to greater scrutiny. For example, in 2009, the Federal Reserve issued new rules extending consumer compliance supervision to nonbank mortgage-originating subsidiaries of bank holding companies. However, these new rules did not apply to independent nonbank mortgage originators. Did this policy change affect the relative riskiness of mortgages issued by the two groups of nonbanks?

Balla et al. study this question using a large sample of mortgages originated by independent nonbanks and nonbank subsidiaries of depository institutions and bank holding companies from 2000 to 2015. Before the Fed’s policy change, mortgages by subsidiary nonbanks had a higher probability of default than mortgages issued by independent nonbanks; after the policy change, the opposite was true. Additionally, there was a small but statistically significant decrease in loan interest rates and loan-to-value ratios for subsidiary nonbanks relative to independent nonbanks after the policy change. These results hold for prime mortgages. For subprime mortgages, subsidiary nonbank originators had higher interest rates and lower loan-to-value ratios than independent nonbank mortgages after the policy change. While the authors do not identify a causal link between the changes in mortgages originated and the Fed’s policy change, their findings are consistent with bank holding companies reducing risk shifting in mortgage lending across subsidiaries after being subjected to greater regulatory scrutiny.