Jumbo rates are below conforming rates: When did this happen and why?

Jumbo rates are below conforming rates: When did this happen and why?

Pre-crisis estimates of the jumbo-conforming spread, utilizing a variety of methodologies, ranged from 10 to 25 basis points. In the post-crisis period, this spread has decreased and has been negative since 2013, indicating a lower rate on jumbo loans. This study re-examines the jumbo-conforming spread in light of market and policy changes, utilizing loan-level data from 2000 to 2017. We show that changes in GSE guarantee fees, movements in the GSE funding advantage, and bank deposit growth — which we use as a proxy for jumbo loan demand — all help explain the variation in the jumbo-conforming spread over this period. The shift from a positive spread before the financial crisis to a negative spread post-crisis is due specifically to a combination of increased bank demand for jumbo loans and higher GSE guarantee fees. Even though the GSE rate advantage has disappeared, some borrowers continue to opt for GSE loans at the conforming limit. The borrowers bunching at the limit likely would not meet the underwriting requirements for a jumbo loan or did not undertake the rate shopping and negotiation required to obtain a substantial jumbo rate advantage.

Stephen D. Oliner, Lynn M. Fisher, Tobias Peter, and Mike Fratantoni

American Enterprise Institute

August 6, 2019

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By |2019-08-13T12:44:37-07:00August 13th, 2019|Financial Regulation, Inequality, Mortgage Finance, Reference, Reforms|