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The Factors Impacting Jumbo and Conforming Mortgage Loans

UnderwritingA new analysis by CoreLogic [1] shows that while contract rates for jumbo loans appear to be lower than conforming mortgage loans on an unadjusted basis, the gap between the two narrows considerably, when the loans are controlled for loan, borrower, and property characteristics.

The analysis indicated that by adjusting the contract rates for both loans on these parameters, jumbo loan rates which appeared to have been 33 basis points lower than conforming ones on an unadjusted basis, were only five basis points below the rates on comparable conforming loans when adjusted for these attributes in the second quarter of 2018.

This analysis follows a previous one by CoreLogic that showed the difference or spread between the average contract rate for jumbo and conforming loans during the last 17 years without adjusting for credit risk, property, location, or scale of economies, CoreLogic revealed in its blog [2] published on Monday.

For its analysis, CoreLogic first compared the average contract interest rates for both loans in 2018 and 2009 by loan origination amount and found an inverse relationship between the interest rate and the loan origination amount.

"The general trend reflects various fixed-costs of origination; in other words, the fixed-cost per dollar of the loan size declines as the loan size increases," wrote Archana Pradhan, Senior Professional, Economist, Office of the Chief Economist at CoreLogic. Similar to 2018, the interest rates in 2009 declined gradually with the loan amount until the conforming loan limit was reached. However, then the rates took a sharp 85 basis point rise."

The analysis then looked at loan level mortgage data for Q1 2001 through Q2 2018 to estimate the effect of jumbo status on the contract interest rate for conventional 30-year fixed-rate home-purchase loans. It found that the contract interest rates on jumbo mortgages still remained slightly lower than the rates on conforming mortgages in the second quarter of 2018 even after controlling for credit risk, location, and scale economies. However, the difference narrowed considerably.

Click here [2] to read the full analysis.