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The Role of Intermediaries in Selection Markets: Evidence from Mortgage Lending

Author

Listed:
  • Jason Allen
  • Robert Clark
  • Jean-François Houde
  • Shaoteng Li
  • Anna Trubnikova

Abstract

We study the role of brokers in selection markets. We find that broker-clients in the Canadian mortgage market are observationally different from branch-clients. They finance larger loans and have more leverage. We build and estimate a model of mortgage demand to disentangle three possible explanations for observed differences in product choice: (i) borrowers have observed preferences for riskier loans, (ii) borrowers have unobserved preferences for riskier loans, (iii) brokers steer borrowers towards riskier products. We find that brokers steer only about 15% of borrowers to mortgages with longer amortization, while borrowers’ own unobservable characteristics drive their decisions for greater leverage.

Suggested Citation

  • Jason Allen & Robert Clark & Jean-François Houde & Shaoteng Li & Anna Trubnikova, 2023. "The Role of Intermediaries in Selection Markets: Evidence from Mortgage Lending," Staff Working Papers 23-12, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-12
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    References listed on IDEAS

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    Cited by:

    1. Chung, Sol & Agnew, Julie & Bateman, Hazel & Eckert, Christine & Liu, Junhao & Thorp, Susan, 2024. "The impact of mortgage broker use on borrower confusion and preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 229-247.

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    More about this item

    Keywords

    Financial institutions; Financial services; Market structure and pricing;
    All these keywords.

    JEL classification:

    • D - Microeconomics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G - Financial Economics
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L - Industrial Organization
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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