The Supply Side of Household Finance

Abstract:

We propose a new, data-based test for the presence of biased financial advice when households choose between Fixed Rate Mortgages (FRM) and Adjustable Rate Mortgages (ARM). If households are wary, the relative cost of FRM and ARM should be a sufficient statistics for a household contract choice: the identity of the bank originating the loan should play no role. If households rely on banks advice to guide their choice, banks may be tempted to bias advice in a direction that is most convenient to them, so that bank-specific characteristics play a role. We test this implication on the sample of 1.6 million mortgages originated in Italy between 2004 and 2010. We find that the choice between ARM and FRM is significantly affected by banks’ characteristics, especially over intervals of time during which banks do not adjust the relative price of the two mortgage types. This supports the view that banks are able to affect household mortgage choices not only through a price but also through an advice channel.