We build a model of the mortgage market in which banks attain their optimal mortgage portfolio by setting rates and steering customers. Sophisticated households know which mortgage type is best for them; naive households are susceptible to banks' steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The average cost of the distortion is equivalent to 16% of the an-nual mortgage payment. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones. Since steering also conveys information about mortgages, re-stricting steering might result in significant welfare losses.
The cost of steering in financial markets: Evidence from the mortgage market / L. Guiso, A. Pozzi, A. Tsoy, L. Gambacorta, P.E. Mistrulli. - In: JOURNAL OF FINANCIAL ECONOMICS. - ISSN 0304-405X. - 143:3(2022 Mar), pp. 1209-1226. [10.1016/j.jfineco.2021.05.013]
The cost of steering in financial markets: Evidence from the mortgage market
A. PozziSecondo
;
2022
Abstract
We build a model of the mortgage market in which banks attain their optimal mortgage portfolio by setting rates and steering customers. Sophisticated households know which mortgage type is best for them; naive households are susceptible to banks' steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The average cost of the distortion is equivalent to 16% of the an-nual mortgage payment. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones. Since steering also conveys information about mortgages, re-stricting steering might result in significant welfare losses.
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