Mortgage pricing and monetary policy

Benetton, Matteo, Gavazza, Alessandro ORCID: 0000-0001-9236-5813 and Surico, Paolo (2024) Mortgage pricing and monetary policy. American Economic Review. ISSN 0002-8282 (In Press)

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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 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.

Item Type:	Article
Additional Information:	© 2024
Divisions:	Economics
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E50 - General
Date Deposited:	27 Nov 2024 10:18
Last Modified:	12 Dec 2024 04:35
URI:	http://eprints.lse.ac.uk/id/eprint/126188

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