DP16456 Mortgage Pricing and Monetary Policy

Author(s): Matteo Benetton, Alessandro Gavazza, Paolo Surico
Publication Date: August 2021
Date Revised: August 2021
Keyword(s): monetary policy, Mortgages, price discrimination
JEL(s): E52, G51, L11
Programme Areas: Financial Economics, Industrial Organization, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16456

This paper provides novel evidence on lenders' mortgage pricing and how central bank policies affected it. Using the universe of mortgages originated in the U.K., we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that during recent periods of unconventional monetary policy, such as the U.K.'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 pricing and lending, and find that central bank policies increased borrower surplus and lender profits. Moreover, although origination fees allow lenders to price discriminate and capture surplus, banning fees would lower borrower surplus and aggregate welfare.