Working Paper: CEPR ID: DP16456
Authors: Matteo Benetton; Alessandro Gavazza; Paolo Surico
Abstract: This paper provides novel evidence on lenders' mortgage pricing and how central bank policies affected it. Using the universe of mortgages originated in the UK, we show that lenders seek to price discriminate across heterogeneous borrowers by offering menus of two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as the UK's Funding for Lending Scheme, lenders decreased interest rates and increased origination fees. To understand lenders' pricing strategies and their effects on market equilibrium, we develop and estimate a structural discrete-continuous model of mortgage demand and lender competition in which borrowers may have different sensitivities to rates and fees. We use the estimated model to decompose the effects of unconventional monetary policies on mortgage market outcomes, and find that central bank policies boosted aggregate mortgage lending. Moreover, although origination fees allow lenders to price discriminate and capture surplus, banning fees would decrease aggregate mortgage lending.
Keywords: mortgages; monetary policy; price discrimination
JEL Codes: E52; G51; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Funding for Lending Scheme (FLS) (G21) | reduction in lenders' funding costs (G21) |
| reduction in lenders' funding costs (G21) | decrease in marginal costs of lending (G21) |
| decrease in marginal costs of lending (G21) | decrease in posted interest rates (E43) |
| decrease in posted interest rates (E43) | increase in origination fees (G21) |
| decrease in posted interest rates and increase in origination fees (G21) | boost in aggregate mortgage lending (G21) |