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

Andreas Fuster (), Stephanie Lo () and Paul S. Willen ()
Additional contact information
Stephanie Lo: Harvard University
Paul S. Willen: Federal Reserve Bank of Boston, NBER

No 805, Staff Reports from Federal Reserve Bank of New York

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 goes to the intermediaries that facilitate these transactions. Based on a new methodology and a new administrative data set, 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 2008-14 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 2008-14, the price of intermediation increased by 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.

Keywords: mortgage finance; financial intermediation; monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 L11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
Date: 2017-01-01, Revised 2017-08-01
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Working Paper: The time-varying price of financial intermediation in the mortgage market (2017) Downloads
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