Staff Working Paper No. 1,176
By João Cocco, S Lakshmi Naaraayanan and Jagdish Tripathy
We use administrative data covering the universe of mortgage originations to individual real estate investors in the United Kingdom to study financing outcomes following a large, unanticipated increase in interest rates. Post-shock, originations become more concentrated among specialist lenders, who exhibit lower interest rate pass-through for larger borrowers. To offset these smaller rate increases, they charge higher loan fees, thereby attenuating the impact of higher rates on interest-coverage ratios and facilitating credit. High-frequency evidence from loans on offer show similar responses, indicating that specialist lenders adjust product design to target specific borrower types and, in doing so, reinforce market segmentation.
Interest-rate fee substitution: credit facilitation in segmented markets
