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

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

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). Real Estate Economics, 2021. https://doi.org/10.1111/1540-6229.12340, Available at SSRN: https://ssrn.com/abstract=3429267 or http://dx.doi.org/10.2139/ssrn.3429267