Is competition a cure for confusion? Evidence from the residential mortgage market

Abstract

Abstract Using the National Survey of Mortgage Originations, we document that borrowers who are more financially sophisticated (measured by their self‐reported understanding of the mortgage process) and more exposed to competition (measured by the number of lenders they considered) pay lower mortgage rate spreads. Yet, competition is not a substitute for sophistication: the benefits of competition accrue to sophisticates as well as to naïfs. Our results complement those from the literature detailing the limits of advice and education, and collectively they paint a pessimistic view about the prospects for simple interventions to close the mortgage rate gap between the informed and the naive.