The Cost of Steering in Financial Markets: Evidence from the Mortgage Market

Abstract

We build a model of the mortgage market where banks attain their optimal mortgage portfolio by setting rates and steering customers. "Sophisticated" households know which mortgage type is best for them; "naive" are susceptible to bank's steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The average cost of the distortion is equivalent to 19% of the annual mortgage payment. Since steering also conveys information about mortgages, restricting steering results in a 4% loss. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones.

Keywords: consumer protection, financial advice, mortgage market, steering

JEL Classification: D12, D18, G21