Non-salient fees in the mortgage market

Lu Liu ()
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Lu Liu: Imperial College and Bank of England

No 819, Bank of England working papers from Bank of England

Abstract: This paper studies supply-side product pricing when consumers underreact to non-salient fees. Using comprehensive data on issued and offered mortgages in the UK, I document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. In order to distinguish from demand factors such as unobservable preferences or product characteristics, I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates. I further find heterogeneity in pricing across lenders: those who rely on high fees tend to have higher funding cost, lower return on equity and larger branch networks, in line with a specialization equilibrium in which high-cost lenders are able to match with less cost-sensitive consumers.

Keywords: Price dispersion; salience; strategic pricing; mortgages (search for similar items in EconPapers)
JEL-codes: D12 D14 D18 G21 G41 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2019-09-06
New Economics Papers: this item is included in nep-eur and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0819

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