Cost Pass-Through and Mortgage Credit: The Case of Guarantee Fees

Fannie Mae and Freddie Mac charge lenders “guarantee fees” to insure mortgages against credit risk. Using changes in guarantee fees as quasi-exogenous variation, we show that lenders completely pass through cost shocks to borrowers, on average, primarily via interest rates rather than upfront fees. However, pass-through is both asymmetric and heterogeneous. Lenders fully pass through cost increases but only 70% of cost decreases. Moreover, pass-through varies significantly by market structure and borrower characteristics. This heterogeneity limits the effectiveness of using guarantee fees as a tool for redistributing costs among borrowers and leads to an underestimation of their cost impact.