Competition and Incentives in Mortgage Markets: The Role of Brokers

Mortgage brokers acting as expert advisors for households often receive commission payments from lenders. This paper empirically analyzes the effects on welfare and market structure of regulations restricting this form of broker compensation. Loan-level data from the universe of UK mortgage originations suggests that (1) brokers increase upstream competition by facilitating the entry of new, lower-cost lenders, and (2) commission rates distort brokers’ advice and generate an agency problem with households. To study the net effect of these forces in equilibrium, I estimate a structural model that features households’ demand for both mortgage products and broker services, lenders’ optimal pricing decisions, and broker-lender bilateral bargaining over commission rates. I use the estimates to evaluate the impact of policies restricting brokers’ commission payments. A ban on commissions leads to a 25% decrease in consumer welfare, whereas a cap equal to the median commission increases consumer surplus by 10%. I find that introducing more restrictive caps decreases broker market power at the expense of increasing lender market power.