Efficiency in the Mortgage Lending Market: Narrowing of Spreads Between Mortgage Rates Offered by Lenders on the Internet

The semi-strong form of the Efficient Markets Hypothesis holds that prices reflect publicly available and relevant information; we hold that a similar pricing paradigm should exist in the mortgage lending markets, and that improved information flows over the past two decades have contributed to greater efficiency in the market for secured real estate loans. We believe this greater efficiency will manifest itself empirically with more rapid loan approvals and increased homogeneity of loan offerings by lenders. Specifically, we hold that information flows have increased with the Internet and that these greater flows have resulted in lower interest rates and narrower differences in the costs of lending between different lenders. Greater competition and transparency of lending rates for the better-informed borrower leads to the commoditization of mortgage loans, particularly with the exponential growth of the secondary mortgage markets. We believe this commoditization is in part attributable to the growth of the Internet. We propose a series of tests that should reveal both the growing efficiency of the mortgage lending market and the portion of that growth that can be attributed to the increasing and accessible information flows on the Internet.