Mortgage pricing and monetary policy

Matteo Benetton (), Alessandro Gavazza and Paolo Surico
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Matteo Benetton: Haas School of Business, University of California

No 936, Bank of England working papers from Bank of England

Abstract: This paper provides novel evidence on lenders’ mortgage pricing and on how central bank operations affected it. Using the universe of mortgages originated in the UK, 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 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 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 central bank unconventional monetary policy on mortgage pricing and lending, finding that central bank operations increased borrower surplus and lender profits. Moreover, although origination fees allow lender to price discriminate and capture surplus, banning fees would lower borrower surplus and aggregate welfare.

Keywords: origination fees; mortgage demand; heterogeneity; structural estimation; unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E52 G21 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2021-08-13
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cwa, nep-eec, nep-isf, nep-mac, nep-mon and nep-ure
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Mortgage Pricing and Monetary Policy (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0936

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