The authors document the shift within the US banking industry away from traditional banking and toward shadow banking. They determine that regulation accounts for 60% of shadow banking growth, while technology accounts for roughly 30%. Moreover, shadow banks are more likely to originate loans to riskier borrowers and areas of larger minority populations because these banks rely heavily on the originate-to-distribute model. This business model allows the mortgage loan originators to sell the loans to Fannie Mae, Freddie Mac, Ginnie Mae, and private securitizations.

Market participants should be fully aware of how the rapidly evolving competitive landscape may present investment opportunities. Specifically, recent changes in technology, regulations, and business models have introduced many new variables for consideration when evaluating not only prospective investments within the banking industry but also the overall economic impact. The recent growth of shadow banking has significantly altered the traditional banking landscape and offered consumers alternative methods to access credit markets. Numerous sectors beyond the banking industry may be affected, which could contribute to broad economic growth. Also, market participants who evaluate mortgage-banked investments should be aware of the prepayment exposures documented within the authors’ research.

The authors segment the financial sector into banks and shadow banks: A bank is a depository institution, and anything else is a shadow bank. Furthermore, a lender is classified as a fintech leader if most of the mortgage application process takes place online. The authors rely on a difference-in-differences framework to isolate any variances related to geographical credit demand characteristics. They also rely on prior research related to the structure of mortgage origination channels and research exploring government-sponsored enterprises (GSEs) and their role in mortgage lending.

The time frame of the study is 2007–2015. The authors use data from the Home Mortgage Disclosure Act application to study loan-level and geographic lending patterns. Fannie Mae and Freddie Mac data are used to assess single-family loan performance. Federal Housing Administration results are analyzed using Housing and Urban Development data. US census data are used for demographic properties. Finally, lawsuit data are compiled from numerous sources, including Law360, the US SEC, and SNL Financial. The authors also use regression analysis to quantify items—for example, the length of time mortgages are held on various lenders’ balance sheets—and to monitor loan performance.

The authors’ findings provide valuable insight into the ever-evolving banking industry and document the seismic shifts that have recently occurred. New technologies can quick disrup developed industries and permanently alter the competitive landscape. The authors do a tremendous job of documenting and explaining the numerous changes that have occurred within the mortgage lending industry. I would enjoy seeing further discussion regarding whether these new technologies have increased or decreased the overall banking system’s stability. I would also enjoy further research exploring the role that GSEs have played in this disruption, either intentionally or unintentionally, and how government guarantees may support further private-sector disruption.