Advertising Expensive Mortgages

We use a unique dataset that combines information on advertising and mortgages originated by subprime lenders to study whether advertising helped consumers find cheaper mortgages. Lenders who advertise more within a region sell more expensive mortgages, measured as the excess rate of a mortgage after accounting for a broad set of borrower, contract, and regional characteristics. These effects are stronger for mortgages sold to less sophisticated consumers. We exploit variation in mortgage advertising induced by the entry of Craigslist across different regions as well as a battery of other tests to demonstrate that the relation between advertising and mortgage expensiveness is not spurious. Our estimates imply that consumers pay on average $7,500 more when borrowing from a lender who advertises. Analyzing advertising content reveals that initial/introductory rates are advertised frequently in a salient fashion in contrast to reset rates, which are rarely advertised. Moreover, the advertised price (APR) is at best uncorrelated with mortgage expensiveness. Our facts reject the canonical models of informative advertising and are instead more consistent with persuasion models, in which the reset rate is shrouded/not salient and advertising is used steer unsophisticated consumers into bad choices by increasing the salience of the initial interest rate