The Value of Intermediaries for GSE Loans

We analyze the costs and benefits of intermediaries for government-sponsored enterprise (GSE) mortgages using regulatory data. We find evidence of lenders pricing for observable and unobservable default risk independently from the GSEs. We then develop and estimate a model of competitive lending in which lenders have skin-in-the-game. Lenders reduce costs by acquiring information beyond the GSEs’ criteria but charge markups. On net, interest rates are higher compared to a counterfactual in which the GSEs’ criteria are implemented passively. In an extension, the observed differences between banks and nonbanks are more consistent with differences in their skin-in-the-game rather than screening quality.