Abstract
Lenders (loan originators) frequently sell the right to service loans to other intermediaries (loan servicers). It is loan servicers rather than originators who are responsible for resolving borrowers’ financial distress. They are also required to make payment advances to investors on behalf of delinquent borrowers until the distress resolution process is complete. We begin with the observation that at the start of the COVID-19 pandemic, shadow banks— nondepository financial institutions—serviced approximately half of the total mortgage debt in the United States (Cherry et al. 2021).1 While shadow banks are significantly better capitalized than traditional banks (Jiang et al. 2020), the large “spike” in payment advances during times of sudden macroeconomic stress may lead to a substantial shortfalls, resulting in a liquidity crunch and possible insolvency of shadow banks.