The Value of Intermediaries for GSE Loans

We analyze the costs and benefits of financial intermediaries on access to credit using confidential regulatory data on mortgages securitized by the government-sponsored enterprises (GSEs). We find evidence of lenders pricing for observable and unobservable default risk independently from the GSEs. We explain these findings using a model of competitive mortgage lending with screening in which lenders acquire information beyond the GSEs' underwriting criteria and retain a positive loss given default. The model shows that the discretionary behavior of lenders, relative to a counterfactual in which lenders passively implement the GSEs' underwriting requirements and price competitively, benefits some borrowers with high observable risk at the expense of the majority of borrowers. Finally, the model suggests that the observed differences between banks and nonbanks are more consistent with differences in their expected loss given default rather than screening quality.