Bone, P. F. (2008). Toward a general model of consumer empowerment and welfare in financial markets with an application to mortgage servicers. The Journal of Consumer Affairs, 42 (2), 165-188.
Brief Summary: Mortgage servicers, firms that collect and distribute homeowners’ mortgage interest, principal, and escrowed taxes and insurance, are prone to mistakes and may engage in predatory practices that negatively affect consumer welfare. Using this industry as a case study, this paper develops a general model of consumer empowerment and welfare. Consumers have little power when dealing with the mortgage servicing companies because of high switching costs and the inability of many mortgage service providers to legally negotiate with consumers. Information disclosure, the most common remedy used to increase consumer empowerment in financial markets, is unlikely to improve consumer welfare.
Implications: Consumers seeking a home loan need to consider whether or not the mortgage lender is planning to sell the loan and understand that, when the loan is sold, the consumer will have no choice in which firm takes care of the mortgages (i.e., collects payments, records payments and handles escrow). Consumer advocates need to refocus efforts away from simply promoting disclosures in the financial market to determine what information actually helps consumers and how that information can be provided most effectively to them.