Abstract
Mortgage banks have become a dominant player in mortgage markets and yet very little is known about their cost structure. This paper presents the first empirical analysis of the cost structure of the mortgage banking industry. Using a sample of mortgage banks originating and servicing loans between 1990–1992, a stochastic cost frontier model was estimated. Estimates of ray- and expansion-path scale economy show evidence of substantial scale economies in the industry which are not exhausted even at the largest output sizes. Further, significant inefficiencies over time were found and the results suggest that they changed with market conditions such as periods of refinancings.
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