Is Competition a Cure for Confusion? Evidence from the Residential Mortgage Market

58 Pages Posted: 2 Aug 2019

See all articles by Steven G. Malliaris

Steven G. Malliaris

University of Georgia - Department of Banking and Finance

Daniel A. Rettl

University of Georgia - Department of Banking and Finance

Ruchi Singh

University of Georgia

Date Written: July 30, 2019

Abstract

Using data from the National Survey of Mortgage Originations (NSMO), we document that borrowers’ financial sophistication (measured as self-reported understanding of mortgages and the mortgage process) and their exposure to competition (measured as the number of lenders they seriously considered) are both associated with lower mortgage rate spreads. However, competition is not a substitute for sophistication: the benefits of competition are at least as strong for sophisticates as they are for naifs. Our results complement those from the literature on financial sophistication which detail the limits of advice (e.g., Guiso et al. (2018)) and education (e.g., Fernandes et al. (2014)), and collectively paint a pessimistic view about the prospects for simple interventions to close the mortgage rate gap between the informed and the naive.

Keywords: financial literacy, competition, mortgage, risk, advice

JEL Classification: D14, D4, G21, L85, R21

Suggested Citation

Malliaris, Steven G. and Rettl, Daniel A. and Singh, Ruchi, Is Competition a Cure for Confusion? Evidence from the Residential Mortgage Market (July 30, 2019). Available at SSRN: https://ssrn.com/abstract=3429267 or http://dx.doi.org/10.2139/ssrn.3429267

Steven G. Malliaris

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Daniel A. Rettl

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Ruchi Singh (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

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