How Informed Were Non-Agency MBS Investors? Evidence from Mortgage Servicing Fees

This paper examines the informativeness of servicing fees regarding the quality of mortgage collateral pools in non-agency securitizations and, ultimately, the value of the mortgage securities. We find that servicing fees capture some unobservable credit risk that explains mortgage default and differentially affects the performance of various security classes. However, junior bond yield spreads at issuance account for this risk, which suggests that investors were more sophisticated than previously thought or that deal issuers were more transparent about collateral credit risk than recognized in the literature. The slow reemergence of non-prime lending as non-qualified mortgage lending makes this study still relevant.