The Time-Varying Price of Financial Intermediation in the Mortgage Market 
Financial intermediaries in the U.S. mortgage market link household borrowers in the primary mortgage market with global investors through the secondary market for mortgage-backed securities (MBS).Mortgage market intermediation is a significant source of income for banks and a major cost to households when they buy or refinance a home. Spending on mortgage intermediation has taken on monetary policy relevance in recent years as household refinancing was a key tool of the FOMC. The authors use a new dataset and develop a new methodology to measure the price of intermediation in the U.S. mortgage market. They analyze how the price of intermediation varies, what factors drive this variation, and how it may affect the pass-through of monetary policy. The authors concentrate on the 2008–2014 period during which the Federal Reserve engaged in quantitative easing (QE) in order to drive down the cost of mortgages for U.S. consumers.
Key Findings
- 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 a large share of the price changes in the secondary market to borrowers in the primary market. This pass-through is asymmetric. Lenders pass on price decreases (meaning higher interest rates) fully but only 80 percent of a price increase (meaning lower interest rates).
- At monthly frequencies, the price of intermediation fluctuates significantly and is highly sensitive to volume: a one standard deviation increase in applications for new mortgages leads to a 30–35 basis point increase in the price of intermediation.
- 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.
- The authors estimate that borrowers spent $135 billion on mortgage market intermediation over the study period.
- 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.
Implications
The costs of intermediation significantly raised the interest rates paid by borrowers, a result that is counter to the intended effect of QE. Of the $135 billion cost increase, about $95 billion involved refinancing of existing mortgages. Such costs could be potentially be much lower if refinancing did not require a full re-underwriting of the mortgage, or if there were more adjustable-rate mortgages, since in that case, the monetary transmission process would not depend on borrowers needing to use financial intermediaries to take advantage of lower mortgage interest rates.
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 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, 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.