Jumbo-Conforming Mortgage Rate Spread Trend

Adjusting for risk, location, and loan-size reduced spread from -30 to -6 basis points during 2013Q2 to 2019Q2

By Archana Pradhan Housing Affordability, Mortgage Finance

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.

Figure 1: Mortgage Rate versus Jumbo-Conforming 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.

Figure 2: Adjusted Quarterly Jumbo-Conforming Spread Estimates, 2001 Q1-2019 Q2

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.

Figure 3: Averages Credit Risk Variables for Homebuyers with 30-Year Fixed Conventional Mortgages

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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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