| Abstract: |
We use a unique dataset that combines information on advertising by subprime
lenders and mortgages originated by them from 2002 to 2007 to study the
relationship between advertising and the nature of mortgages obtained by
consumers. We exploit the richness of our data and measure the relative
expensiveness of a given mortgage as the excess rate of a mortgage after
accounting for a broad set of borrower, contract, and regional characteristics
associated with a given mortgage--less expensive mortgages, all else equal,
are better products from the perspective of the consumer. We find a strong
positive relationship between the intensity of local advertising and the
expensiveness of mortgages extended by lenders within a given region, with the
relationship strongest for advertising through newspapers, the most heavily
used channel for local advertising of mortgages. This pattern survives even
after conditioning for a rich set of borrower, loan and region characteristics
and exploiting differences in advertising within a given lender. Advertisers
lend to consumers who, all else equal, default less, making it unlikely that
our results are driven by unobservable borrower quality. We also exploit
variation in mortgage advertising induced by the entry of Craigslist across
different regions to demonstrate that the relation between advertising and
expensiveness of mortgages is not likely to be spurious. We corroborate that
advertising is most effective when targeted at groups that might be less
informed about mortgages, such as the poor, the less educated and minorities.
These findings are inconsistent with the “informative view” under which
advertising allows consumers to find cheaper products, and instead support the
“persuasive view” that advertising in the subprime mortgage market was used to
steer consumers into expensive choices. |