Paying Too Much? Price Dispersion in the US Mortgage Market

62 Pages Posted: 22 Jul 2019

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Andreas Fuster

Swiss National Bank - Financial Stability

Aurel Hizmo

Board of Governors of the Federal Reserve System

Date Written: July 19, 2019

Abstract

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

Bhutta, Neil and Fuster, Andreas and Hizmo, Aurel, Paying Too Much? Price Dispersion in the US Mortgage Market (July 19, 2019). Available at SSRN: https://ssrn.com/abstract=3422904 or http://dx.doi.org/10.2139/ssrn.3422904

Neil Bhutta

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andreas Fuster (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

Aurel Hizmo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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