Paying Too Much? Price Dispersion in the US Mortgage Market
62 Pages Posted: 22 Jul 2019
Date Written: July 19, 2019
We document wide dispersion in the mortgage rates that households pay on identical loans, and assess the role of financial knowledge and shopping in the rates obtained. To study dispersion, we draw on new data where we observe the rates being offered by lenders, the rates consumers actually "lock in", and key rate covariates including discount points, rate-lock date, and all underwriting information. We find a difference between the 90th and 10th percentile interest rate that identical borrowers pay for the same loan, with the same points, in the same market, and on the same day, of 53 basis points — equivalent to about $6,750 in upfront costs (points) for the average loan. Even with the same loan officer borrowers can end up with substantially different rates, suggesting an important role for financial knowledge and negotiation. Comparing locked rates to the median offer rate for the same type of borrower in the same market on the same day, we find that this lock-offer spread is widest for low-FICO and high- LTV borrowers, implying that such borrowers pay more not just because of credit risk, but also because of less effective search and negotiation. However, this spread compresses when Treasury rates rise, suggesting that a rising level of borrowing costs encourages more search and negotiation. Finally, using the new National Survey of Mortgage Originations, we provide novel direct evidence that mortgage rates decline with mortgage knowledge and shopping; that knowledge and shopping vary substantially across borrowers and are correlated with socioeconomic characteristics; and that shopping activity intensifies in higher interest rate environments.
Keywords: mortgages, household finance, interest rates, financial literacy, price dispersion
JEL Classification: G21, D14, D18, D83, E43
Suggested Citation: Suggested Citation