Paying Too Much? Price Dispersion in the U.S. Mortgage Market

71 Pages Posted: 24 Aug 2020

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Aurel Hizmo

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

We document wide dispersion in the mortgage rates that households pay on identical loans, and show that borrowers' financial sophistication is an important determinant of the rates obtained. We estimate a gap between the 10th and 90th percentile mortgage rate that borrowers with the same characteristics obtain for identical loans, in the same market, on the same day, of 54 basis points|equivalent to about $6,500 in upfront costs (points) for the average loan. Time-invariant lender attributes explain little of this rate dispersion, and considerable dispersion remains even within loan officer. Comparing the rates borrowers obtain to the real-time distribution of rates that lenders could offer for the same loan and borrower type, we find that borrowers who are likely to be the least financially savvy tend to substantially overpay relative to the rates available in the market. In the time series, the average overpayment decreases when overall market interest rates rise, suggesting that a rising level of borrowing costs encourages more search and negotiation. Furthermore, new survey data provide direct evidence that financial knowledge and shopping both affect the mortgage rates borrowers get, and that shopping activity increases with the level of market rates.

JEL Classification: E43, G21, G53, G51

Suggested Citation

Bhutta, Neil and Fuster, Andreas and Hizmo, Aurel, Paying Too Much? Price Dispersion in the U.S. Mortgage Market (August, 2020). FEDS Working Paper No. 2020-62, Available at SSRN: https://ssrn.com/abstract=3679204 or http://dx.doi.org/10.17016/FEDS.2020.062

Neil Bhutta (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Aurel Hizmo

Board of Governors of the Federal Reserve System ( email )

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

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
128
Abstract Views
476
rank
302,469
PlumX Metrics