Pricing Effects of the Decision to Sell or Hold Adjustable Rate Mortgage Loans in a Portfolio

Residential mortgage originators can transfer loans to ultimate lenders quickly and efficiently using the secondary mortgage market. Some adjustable rate mortgage (ARM) lenders use this outlet consistently while others hold whole loans in their portfolios on a long-term basis. Selling and holding lenders should respond to different economic factors when setting yields on ARM loans originated because their long-term positions in the loans are so diverse. This paper develops and tests a model of differential pricing behavior for selling and holding strategies. Empirical results support the notion that lenders use different factors to price loans and that these factors are related to the risks faced by the originating lender given its origination strategy. Additional findings suggest that institutional and firm-specific pricing tendencies exist in the primary mortgage market for adjustable rate debt.