Is Competition a Cure for Confusion? Evidence from the Residential Mortgage Market
58 Pages Posted: 2 Aug 2019
Date Written: July 30, 2019
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: Suggested Citation