Events at CERGE-EI

Let us invite you to a Brown Bag Seminar by Ante Sterc (CERGE-EI PhD student)
on Thursday, October 13, 2022, at 13:00 in room 402

You can join also online: Lifesize link: https://call.lifesizecloud.com/15960736, password: 3496

Presenter: Ante Sterc

Title: "Search and Skills in the Mortgage Market"

Abstract: "The size of the U.S. mortgage market has been steadily increasing ever since 2012, reaching all-time highs during the pandemic due to the increase in demand. While other studies focus on the home price expectations, we focus on the effect of borrowers’ financial knowledge on their mortgage performance. Our objective is to capture the difference in borrowers’ search efficacy in the mortgage refinance market. Holding other characteristics constant, the interaction of the borrower’s education and search effort explains a portion of the interest rate obtained at mortgage origination. To set grounds for financial skill importance in the mortgage market, we exploit public survey data and incorporate Bayesian Record Linkage method to impute borrower’s financial literacy. Financial literacy remains significant predictor of the interest rate attained upon refinancing. Finally, to capture mortgage refinance interest rate dispersion, we develop a search model with endogenous financial skill accumulation. In contrast to standard models in the literature, we focus on the agent’s search effort while incorporating the lender’s market power via observable default probability. In the model, higher financial skills imply higher wage and lower search costs, accumulating knowledge takes time from work. Our goal is to identify consumption disparities in the economy’s financial skills and propose policies that reduce search costs through financial education."

This project is co-financed by the European Union.