Market Power in Mortgage Pricing: the Role of Referral Lending

Despite intense competition among mortgage lenders, borrowers face elevated mortgage rates and substantial price dispersion. We argue that realtor--loan-officer referral networks are a key source of lender market power: by steering homebuyers toward a limited set of loan officers, they restrict borrower choice even in otherwise competitive markets. Linking 91,988 realtors to 123,749 loan officers in 40 states, we document that such networks are pervasive and highly concentrated: 79% of realtors direct over 40% of their clients to just four loan officers, despite having on average 176 loan officers in the market. Strikingly, this concentration persists and even increases in markets with more lenders, suggesting that referrals constrain choice regardless of market structure. Controlling for borrower characteristics and lender choices, IV estimates suggest borrowers using referred loan officers pay 17.7 basis points more, equivalent to $2,712 in upfront costs at the average loan of $333K. The premium is more than twice as large for first-time home buyers, highlighting the role of experience and financial sophistication. A second identification strategy exploits the 2023 CFPB enforcement order against Freedom Mortgage, which terminated a set of paid referral relationships. Exploiting entirely different variation, this design confirms that referral lending raises borrowing costs, with a larger premium among the paid relationships the order disrupted. Two mechanisms operate: referrals reduce borrowers' search intensity across lenders, and they insulate individual loan officers from competition within their own institution, allowing referred officers to charge higher rate spreads than their colleagues. Neither faster processing time nor reduced denial risk justifies the premium. Our findings reveal referral networks as a hidden source of market power in the lending market, imposing substantial financial costs and raising equity concerns for borrowers.