No Shopping in the U.S. Mortgage Market: Direct and Strategic Effects of Providing Information

70 Pages Posted: 7 Apr 2017 Last revised: 15 May 2018

Alexei Alexandrov

Independent

Sergei Koulayev

Consumer Financial Protection Bureau

Date Written: May 11, 2018

Abstract

We document and analyze price dispersion in the U.S. mortgage market. We find significant price dispersion in posted prices in the retail channel: for example, a consumer with a prime credit score and with a 20% down payment for a conforming loan might see a spread in interest rates of 50 basis points, controlling for all relevant consumer/property characteristics, including discount points. This amounts to extra 342 dollars per year, for every 100,000 of the loan. We also show, from survey evidence, that close to half of consumers did not shop before taking out a mortgage, and that most consumers do not seem to realize that there is price dispersion. Using a proprietary dataset of lenders' ratesheets, we estimate an equilibrium model of costly search where majority of consumers hold incorrect beliefs regarding price dispersion. In addition to search costs, we show that non-price factors, such as consumer preference of one lender over another, also play an important role in preventing consumers from searching more. In one of our counterfactuals, we show that if 20% of consumers had obtained one extra quote, consumers would save $4 billion dollars a year, most coming from the indirect/equilibrium effect of firms lowering prices in response to more shopping. In another counterfactual, we show that if consumers were to focus on mortgage cost only, they would save about $9 billion dollars a year.

Suggested Citation

Alexandrov, Alexei and Koulayev, Sergei, No Shopping in the U.S. Mortgage Market: Direct and Strategic Effects of Providing Information (May 11, 2018). Consumer Financial Protection Bureau Office of Research Working Paper No. 2017-01. Available at SSRN: https://ssrn.com/abstract=2948491 or http://dx.doi.org/10.2139/ssrn.2948491

Alexei Alexandrov (Contact Author)

Independent

No Address Available

Sergei Koulayev

Consumer Financial Protection Bureau ( email )

United States

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