Mortgage Intermediation Costs and the Risk of Inflated Pricing

Introduction

Mortgage borrowers often focus on the interest rate of a loan while paying less attention to the revenue earned by the intermediaries who originate and distribute mortgages. Academic research from the Federal Reserve has attempted to quantify this cost. In their widely cited paper The Time-Varying Price of Financial Intermediation in the Mortgage Market, Andreas Fuster, Stephanie Lo, and Paul Willen estimate the effective price of mortgage intermediation over time.

Their analysis shows that during the years following the financial crisis the average price of mortgage intermediation rose substantially. Between 2008 and 2014 the estimated cost of originating and distributing a mortgage averaged roughly 142 basis points of the loan balance. For a typical mortgage this translates into several thousand dollars in intermediary revenue.

How Much Originators Earn

Mortgage intermediation includes the activities performed by brokers, lenders, and the institutions that ultimately sell loans into secondary markets. These entities earn revenue through origination fees, yield spreads embedded in the rate, and servicing value created when the loan is sold or securitized.

Because borrowers often receive only a small number of mortgage quotes, pricing dispersion can occur across lenders. Some lenders may price loans close to the underlying cost of intermediation, while others may charge significantly more depending on borrower search behavior and market conditions.

Potential for Inflated Pricing

The existence of price dispersion means borrowers may face significantly different pricing outcomes depending on which lender originates the loan. When a borrower receives only a single quote, the lender has more flexibility to embed higher margins into the mortgage rate or upfront fees.

For higher loan balances the financial impact becomes even larger. A pricing difference of even a few tenths of a percentage point in intermediation revenue can translate into thousands of additional dollars paid by the borrower. This dynamic helps explain why academic researchers and consumer regulators consistently emphasize the importance of comparing Loan Estimates across multiple lenders.

Implications for Borrowers

The Federal Reserve research highlights a central feature of the mortgage market: the cost of financial intermediation is real, measurable, and variable across lenders. While mortgage origination requires significant infrastructure and compliance costs, the dispersion in pricing suggests that competitive pressure plays an important role in determining the final price paid by the borrower.

For borrowers evaluating mortgage offers, the implication is clear. Obtaining multiple Loan Estimates remains one of the most effective ways to identify inflated pricing and secure more competitive mortgage terms.