Jumbo loan spreads have decreased from -30 to -6 over the past six years. An analysis by CoreLogic [1] has revealed that much of this variation occurred because of an increase in the GSE guarantee fee, a reduction in the GSE funding advantage, and portfolio lenders’ desire to hold jumbo loans.
In a video blog [2], Archana Pradhan, Principal, Economist, Office of the Chief Economist at CoreLogic analyzed the changes in spreads for jumbo loans between the second quarters of 2013 and 2019. She found that before 2013, mortgage rates for jumbo loans were higher than those for conforming loans. However, since 2013 the rate-difference narrowed and today jumbo loans typically have a lower interest rate.
Jumbo loan spreads were also impacted by the movements in interest rates over this time period and indicated an inverse relationship.
Giving an example, Pradhan said that spreads increased in the first eight months of 2019 as the mortgage rate dropped. "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," Pradhan said.
But, when the data was controlled for borrower and loan credit risk, location, and loan size characteristics, the spread was near zero. In fact, the adjusted estimates indicated that the spread narrowed from an average of -30 basis points (with no adjustments for differences in attributes) to -6 basis points for the adjusted estimate, averaged from the second quarter of 2013 to the second quarter of 2019.
When compared with conforming loans, jumbo loans today also have a higher credit underwriting standard. According to Pradhan, "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."