NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Time-Varying Price of Financial Intermediation in the Mortgage Market

Andreas Fuster, Stephanie H. Lo, Paul S. Willen

NBER Working Paper No. 23706
Issued in August 2017
NBER Program(s):The Corporate Finance Program, The Economic Fluctuations and Growth Program, The Monetary Economics Program, The Public Economics Program

The U.S. mortgage market links homeowners with savers all over the world. In this paper, we ask how much of the flow of money from savers to borrowers goes to the intermediaries that facilitate these transactions. Based on a new methodology and a new administrative dataset, we find that the price of intermediation, measured as a fraction of the loan amount at origination, is large—142 basis points on average over the 2008–2014 period. At daily frequencies, intermediaries pass on price changes in the secondary market to borrowers in the primary market almost completely. At monthly frequencies, the price of intermediation fluctuates significantly and is highly sensitive to volume, likely reflecting capacity constraints: a one standard deviation increase in applications for new mortgages leads to a 30–35 basis point increase in the price of intermediation. Additionally, over 2008–2014, the price of intermediation increased about 30 basis points per year, potentially reflecting higher mortgage servicing costs and an increased legal and regulatory burden. Taken together, the sensitivity to volume and the positive trend led to an implicit total cost to borrowers of about $135 billion over this period. Finally, increases in application volume associated with “quantitative easing” (QE) led to substantial increases in the price of intermediation, which attenuated the benefits of QE to borrowers.

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Document Object Identifier (DOI): 10.3386/w23706

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