Since 2013, large-balance mortgage loans (jumbo loans) have broken the trend of holding a higher interest rate than smaller conforming loans. In the first quarter of 2018, jumbo loans were 33 basis points cheaper to the borrower than a conforming loan, so what made these loans cheaper? In a recent study, CoreLogic investigated what made jumbo loans the lower cost option compared to the more popular but more expensive conforming loans.
The study indicated that over the last 17 years, conforming loans were a better deal for borrowers between Between Q2 2007 and Q1 2013. They were the cheaper option, especially during the Great Recession, peaking in Q2 2009 when conforming loans were around 90 basis points cheaper. However the trend reversed in Q2 2013 when jumbo loans "began to have a lower average contract rate," the report said. "The difference continues to favor jumbo loans by about 30 basis points through Q1 2018."
CoreLogic determined that the declining jumbo-to-conforming rate difference is due in part to increasing guarantee fees on conforming loans purchased by Fannie Mae and Freddie Mac. Since 2010, the average guarantee fee has nearly tripled, increasing from 22 basis points to 57 basis points as of 2017. Jumbo loans are too big to be purchased by Fannie Mae and Freddie Mac, leaving them untouched by the fee increases.
According to CoreLogic, nearly all jumbo loans are a full doc and made to prime borrowers, which means these loans have relatively high credit standards. Homebuyers with 30-year fixed-rate jumbo loans tended to have higher credit scores than other buyers. These buyers’ credit scores were 18 points higher on average than those with conforming loans as of Q1 2018. These factors may have also led to the lower cost of jumbo loans.
Find more on jumbo loans from CoreLogic here.