Value of Information, Search, and Competition in the UK Mortgage Market

48 Pages Posted: 4 May 2022

See all articles by Mateusz Myśliwski

Mateusz Myśliwski

University College London - Department of Economics

May Rostom

Bank of England

Date Written: March 25, 2022

Abstract

We formulate a structural model of search with lender and borrower heterogeneity to estimate the value of information provided to UK households by mortgage brokers. Using administrative data on loans originating in 2016 and 2017, we document the existence of a substantial degree of unexplained price dispersion, and observe that while mortgages obtained from brokers are cheaper, borrowers who use intermediaries pay more once commissions are factored in. Assuming that borrowers with high search costs are more likely to use brokers, we nonparametrically estimate the distributions of search, and the banks’ costs of providing these loans. Our results show that search costs vary by demographic groups, and that broker presence exerts negative pressure on lenders’ market power. Compared to a world where broker advice is unavailable, we estimate their presence reduces average monthly mortgage costs by 21%, and welfare losses arising from search frictions by 70% – although the results differ by borrower and loan charateristics. We also find that regulation in support of market centralization halves lenders’ markups and lowers monthly costs of an average mortgage by 4.4%.

Keywords: Mortgage markets, consumer search, intermediation, auction estimation

JEL Classification: C57, D83, G21, L85

Suggested Citation

Myśliwski, Mateusz and Rostom, May, Value of Information, Search, and Competition in the UK Mortgage Market (March 25, 2022). Bank of England Working Paper No. 967, Available at SSRN: https://ssrn.com/abstract=4083132 or http://dx.doi.org/10.2139/ssrn.4083132

Mateusz Myśliwski

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

May Rostom (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
68
Abstract Views
248
Rank
603,475
PlumX Metrics