This paper develops a nonparametric methodology for assessing the quality of households’ product search in the (highly heterogeneous) UK mortgage market, requiring no assumptions about preferences over product characteristics beyond non-satiation. Using a uniquely detailed combination of lending transaction reports, product information and credit files for nearly 700,000 UK households that took out a mortgage between January 2015 and July 2016, I am able to conduct pairwise multidimensional comparisons between all products for which each borrower was eligible. This allows me identify choices where the chosen mortgage was strictly dominated on all elements of borrowing cost (interest rates, fees) by another available alternative with the same non-price characteristics. I find that 30% of UK households in the sample chose dominated mortgages, paying £550 ($750) more per year on average as a result. There is strong variation in rates of dominated choices across demographic groups. Going to a lender with whom a borrower has an existing relationship (current account, credit card, etc) is associated with increased probability of making a dominated mortgage choice.
FCA Occasional Paper 33,
We exploit a change in conduct regulation – the Mortgage Market Review (MMR) in 2014 – to estimate the effects of mandatory advice on the choices of UK mortgage borrowers. To estimate the effect on various aspects of consumer choices, we first construct a unique dataset that combines the entire population of residential mortgage originations from mid-2012 to mid-2016 with credit reference agency data and detailed product data on mortgage contracts. We use machine learning-assisted diff-in-diff matching on the repeated cross-section data to estimate the counterfactual outcome for mortgage borrowers that did not use mortgage advice before the MMR, but were effectively forced to do so afterwards. We find that advice made these borrowers more likely to fix their rates for short periods, choose longer mortgage terms and use an intermediary. We find no effects of mandatory advice on various metrics of borrowing cost. We also use apply a matching estimator to the post-MMR data to describe the effects of using an intermediary on borrower outcomes.
FCA Occasional Paper 34,