Mortgage pricing and monetary policy

Abstract

This paper provides novel evidence on lenders' mortgage pricing and on how central bank operations affected it. Using the universe of mortgages originated in the UK, we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as UK's Funding for Lending Scheme, lenders decreased interest rates and increased origination fees. To understand lenders' pricing strategies and their effects on market equilibrium, we develop and estimate a structural discrete-continuous model of mortgage demand and lender competition in which borrowers may have different sensitivities to rates and fees. We use the estimated model to decompose the effects of central bank unconventional monetary policy on mortgage pricing and lending, finding that central bank operations increased borrower surplus and lender profits. Moreover, although origination fees allow lender to price discriminate and capture surplus, banning fees would lower borrower surplus and aggregate welfare.

Auto Dealer Loan Intermediation: Consumer Behavior and Competitive Effects

“…Our work contributes to the literature on retail financial markets and to the literature on auto markets. A common theme of closely related papers is that intermediaries market products to consumers who are either financially unsophisticated, face substantial search costs, or are unaware of sellers' conflict of interest (Woodward and Hall, 2010, Allen et al, 2014, Guiso et al, 2018, Egan, 2018, Egan et al, 2019, Robles-Garcia, 2019, Benetton et al, 2019, Bhattacharya et al, 2019. Our findings imply that policies which simplify the decision problem of consumers in markets for complex goods may benefit consumers.…”

Advantageous selection with intermediaries: a study of GSE‐securitized mortgage loans

“…I do not consider a two-tier pricing structure among lenders (i.e., up-front fees versus interest rates). Though the form of pass-through (e.g., up-front fees or interest rates) is important in other mortgage markets (Benetton, Gavazza, and Surico, 2021), the pass-through of the guarantee fee is typically in the form of interest rates in the GSE market because borrowers tend to choose against up-front payments (Federal Housing Finance Agency, 2020). 30 In reality, besides the guarantee fee, lenders might incur some fixed costs (e.g., administrative costs).…”