Discounting in Mortgage Markets
AbstractThis paper studies discounting in mortgage markets. Using transaction-level data on Canadian mortgages, we document that over time there’s been an increase in the average discount, along with substantial dispersion. The standard explanation for dispersion in credit markets is that lenders engage in risk-based pricing. Our setting is unique since contracts are guaranteed by government-backed insurance, meaning risk cannot be the main driver of dispersion. We find that mortgage rates depend on individual, contractual, and shopping market characteristics. There is also an important amount of unobserved heterogeneity in rates, which could be attributed to search costs.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 11-3.
Length: 53 pages
Date of creation: 2011
Date of revision:
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Financial institutions; Financial services;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L0 - Industrial Organization - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-12 (All new papers)
- NEP-BAN-2011-02-12 (Banking)
- NEP-BEC-2011-02-12 (Business Economics)
- NEP-URE-2011-02-12 (Urban & Real Estate Economics)
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- Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Competition and Concentration in Search and Negotiation Markets: Evidence from Mortgage Lending," Working Papers 12-4, Bank of Canada.
- Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market," Working Papers 12-30, Bank of Canada.
- Barrutia Legarreta, José María & Espinosa Alejos, María Paz, 2012. "Consumer Expertise or Credit Risk? An empirical analysis of mortgage pricing," DFAEII Working Papers 2012-04, University of the Basque Country - Department of Foundations of Economic Analysis II.
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