Monetary Policy and Mortgage Pricing
-Industrial Organization Seminar
Abstract: Using the universe of U.K. mortgages originated during 2010-2014, we provide new evidence on lenders’ mortgage pricing and how unconventional monetary policy may have affected it. Specifically, we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that this two-part pricing has become more prevalent during recent periods of unconventional monetary policy, such as U.K.’s Funding for Lending Scheme. To understand the effects of lenders’ pricing strategies on market equilibrium, we develop and estimate a structural model of mortgage choice and lender competition in which borrowers may have different elasticities to rates and fees. We use the estimated model to decompose the effect of unconventional monetary policy on mortgage pricing, as well as to compute the contribution of two-part pricing to lenders’ profits and borrowers’ surplus.
*joint with Matteo Benetton and Paolo Surico