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The time-varying price of financial intermediation in the mortgage market

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Abstract

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 actually 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 the 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 each 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 U.S. households of about $140 billion over this period. Finally, the 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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  • Andreas Fuster & Stephanie Lo & Paul S. Willen, 2017. "The time-varying price of financial intermediation in the mortgage market," Working Papers 16-28, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:16-28
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    Cited by:

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    2. Mikel Bedayo & Gabriel Jiménez & José-Luis Peydró & Raquel Vegas, 2020. "Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures," Working Papers 1215, Barcelona School of Economics.
    3. Andreas Fuster & Aurel Hizmo & Lauren Lambie-Hanson & James Vickery & Paul S. Willen, 2021. "How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic," Working Papers 21-4, Federal Reserve Bank of Boston.
    4. Buchak, Greg & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2018. "Fintech, regulatory arbitrage, and the rise of shadow banks," Journal of Financial Economics, Elsevier, vol. 130(3), pages 453-483.
    5. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    6. Piskorski, Tomasz & Seru, Amit, 2021. "Debt relief and slow recovery: A decade after Lehman," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1036-1059.
    7. Martin Beraja & Andreas Fuster & Erik Hurst & Joseph Vavra, 2019. "Regional Heterogeneity and the Refinancing Channel of Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(1), pages 109-183.
    8. Andreas Fuster & David Lucca & James Vickery, 2023. "Mortgage-backed securities," Chapters, in: Refet S. Gürkaynak & Jonathan H. Wright (ed.), Research Handbook of Financial Markets, chapter 15, pages 331-357, Edward Elgar Publishing.
    9. Michael J. Fleming & Haoyang Liu & Rich Podjasek & Jake Schurmeier, 2022. "The Federal Reserve’s Market Functioning Purchases," Economic Policy Review, Federal Reserve Bank of New York, vol. 28(1), pages 210-241, July.
    10. Braggion, Fabio & Manconi, Alberto & Pavanini, Nicola & Zhu, Haikun, 2022. "The Value of Financial Intermediation: Evidence from Online Debt Crowdfunding," CEPR Discussion Papers 14740, C.E.P.R. Discussion Papers.
    11. Deeksha Gupta, 2018. "Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices," 2018 Meeting Papers 512, Society for Economic Dynamics.
    12. Neil Bhutta & Daniel R. Ringo, 2017. "The Effect of Interest Rates on Home Buying : Evidence from a Discontinuity in Mortgage Insurance Premiums," Finance and Economics Discussion Series 2017-086, Board of Governors of the Federal Reserve System (U.S.).
    13. Andreas Fuster & Matthew Plosser & James Vickery, 2018. "Does CFPB Oversight Crimp Credit?," Staff Reports 857, Federal Reserve Bank of New York.

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    More about this item

    Keywords

    mortgage finance; financial intermediation; monetary policy transmission;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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