Nonparametric Testing for Information Asymmetry in the Mortgage Servicing Market

Abstract

Our main objective is to test for evidence of information asymmetry in the mortgage servicing market. Does the sale of mortgage servicing rights (MSR) by the initial lender to a second servicing institution unveil any residual asymmetric information? We analyze the originator’s selling choice of MSR using a large sample of U.S. mortgages that were privately securitized during the period of January 2000 to December 2013 (more than 5 million observations). Our econometric methodology is mainly non-parametric and the main test for the presence of information asymmetry is driven by kernel density estimation techniques (Su and Spindler, 2013). We also employ the non-parametric testing procedure of Chiappori and Salanie (2000). For robustness, we present parametric tests to corroborate our results after controlling for observable risk characteristics, for econometric misspecification error, and for endogeneity issues using instrumental variables. Our empirical results provide strong support for the presence of second-stage asymmetric information in the mortgage servicing market.