The Role of Intermediaries in Selection Markets: Evidence from Mortgage Lending

We study the role of brokers in selection markets. We find that broker-clients in the Canadian mortgage market are observationally different from branch-clients. They finance larger loans and have more leverage. We build and estimate a model of mortgage demand to disentangle three possible explanations for observed differences in product choice: (i) borrowers have observed preferences for riskier loans, (ii) borrowers have unobserved preferences for riskier loans, (iii) brokers steer borrowers towards riskier products. We find that brokers steer only about 15% of borrowers to mortgages with longer amortization, while borrowers’ own unobservable characteristics drive their decisions for greater leverage.