Originators, wholesalers, and conduits: The marginal value of the contract rate on 30-year conventional mortgages

Abstract

The model we present solves for the value of an incremental change in the mortgage contract given an expectation about the time the mortgage will be outstanding and a required return for this time span. The marginal value participants in the primary mortgage market place on the contract rate of a 30-year conventional mortgage determines the array of bids for new mortgage production. Mortgagors can issue mortgages at various discounts. High discounts are associated with low contract rates, and low discounts are associated with high contract rates. This article examines the way wholesale dealers and conduits value the various contract rates associated with current production of 30-year conventional mortgages.