SMU SOE Seminar Series (May 20, 2025): Referral Lending and Mortgage Market Power: The Role of Realtors

TOPIC:

ABSTRACT

This paper examines realtor-loan officer referral networks as a key source of mortgage market power. Despite the high level of competition in mortgage lending, significant price dispersion persists. We argue that realtors steer homebuyers toward a limited set of loan officers, restricting borrower choice even in competitive markets. Using a unique dataset that maps the entire realtor-loan officer network across 17 states and Washington, D.C., we document substantial concentration within these networks, with 85% of realtors likely referring their clients to a limited number of loan officers. Borrowers who work with high-concentration realtors pay 12 basis points higher mortgage rates, even after controlling for borrower and mortgage characteristics. Instrumental variable (IV) estimates confirm that referral-driven constraints impose a premium of 19.7 basis points (equivalent to $2,722 in upfront costs) on homebuyers who choose referred loan officers. This premium primarily results from suboptimal lender selection and is particularly severe for Black, Hispanic, and financially constrained borrowers. While referred loan officers might improve the likelihood of mortgage approval and expedite mortgage processing (by 0.45 days), these benefits do not fully justify the higher borrowing costs. Our findings suggest that realtor referral networks reinforce mortgage market power, imposing significant financial burdens and raising equity concerns for borrowers.

Keywords: Realtors, Mortgage Brokers, Network, Steering.

JEL: L91, R13, R21.

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