Is Competition a Cure for Confusion? Evidence from the Residential Mortgage Market
61 Pages Posted: 2 Aug 2019 Last revised: 12 Sep 2020
Date Written: July 30, 2019
Using the National Survey of Mortgage Originations, we document that borrowers who are more financially sophisticated (measured by their self-reported understanding of the mortgage process) and more exposed to competition (measured by the number of lenders they considered) pay lower mortgage rate spreads. Yet competition is not a substitute for sophistication: the benefits of competition accrue to sophisticates as well as to naifs. Our results complement those from the literature detailing the limits of advice and education, and collectively they 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: Suggested Citation