Before 2013 mortgage rates for jumbo loans were higher than for conforming loans. However, since 2013 the rate-difference narrowed and today jumbo loans typically have a lower interest rate.
An increase in GSE guarantee fee, a reduction in the GSE funding advantage, and portfolio lenders’ desire to hold jumbo loans explain much of the variation in the jumbo-conforming spread.[1] Movement in interest rates may also help explain some of the variation in the jumbo-conforming spread, especially since 2013. The mortgage rate and the jumbo-conforming rate spread are inversely correlated (Figure 1).[2] For example, as the mortgage rate dropped during the first eight months of 2019 the spread has gone up. As the mortgage rate dropped the refinance application volume jumped up; because of a limited secondary market for jumbo loans and cutbacks in staffing at many lenders, bottlenecks in jumbo-loan production were reflected in a rise in the spread.

However, after controlling for borrower and loan credit risk, location, and loan size characteristics, the spread is near zero (Figure 2).[3] The adjusted estimates show that the spread narrowed from an average of negative 30 basis points (with no adjustments for differences in attributes) to negative 6 basis points for the adjusted estimate, averaged from the second quarter of 2013 to the second quarter of 2019.

In general, today’s jumbo loans have a higher credit underwriting standard than conforming loans (Figure 3). Comparing jumbo and conforming loans originated in 2018, jumbo loans had higher average credit scores by 26 points, lower LTV by 6 percentage points and lower DTI by 3 percentage points. These differences help account for much of the jumbo-conforming spread over the past several years.

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[1] See AEI working paper https://www.aei.org/research-products/working-paper/jumbo-rates-rates-causes-implications/ and https://www.corelogic.com/blog/2018/08/why-are-jumbo-loans-cheaper-than-conforming-loans.aspx
[2] Only 30-year fixed-rate conventional home-purchase loans were included for both conforming mortgage loans and jumbo mortgage loans for this analysis.
[3] https://www.corelogic.com/blog/2018/10/jumbo-conforming-spread-risk-location-scale-economies-affect-rate.aspx
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