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

57 Pages Posted: 7 Apr 2017  

Alexei Alexandrov

Amazon.com

Sergei Koulayev

Consumer Financial Protection Bureau

Date Written: March 14, 2017

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 might see a spread in interest rates of 50 basis points, controlling for all relevant consumer/property characteristics, including discount points. We also show, from survey evidence, that close to half of consumers did not shop before taking out a mortgage, and worse, many 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 a share of consumers holds incorrect beliefs regarding price dispersion. Whereas high search costs is one reason behind the lack of search, we show that non-price preferences also play an important role in preventing consumers from searching more; and so an effective policy would target both. In one of our counterfactuals, we show that eliminating non-price preferences results in savings of 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 (March 14, 2017). Consumer Financial Protection Bureau Office of Research Working Paper No. 2017-01. Available at SSRN: https://ssrn.com/abstract=2948491

Alexei Alexandrov (Contact Author)

Amazon.com ( email )

Seattle, WA 98144
United States

Sergei Koulayev

Consumer Financial Protection Bureau ( email )

United States

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