Keywords: Fannie Mae, Freddie Mac, GSEs, mortgages, MBS, securitization, mortgage rates
Abstract: We derive a theoretical model of how jumbo and conforming mortgage rates are
determined and how the jumbo-conforming spread might arise. We show that mortgage
rates reflect the cost of funding mortgages and that this cost of funding can drive a wedge
between jumbo and conforming rates (the jumbo-conforming spread). Further, we show
how the jumbo-conforming spread widens when mortgage demand is high or core
deposits are not sufficient to fund mortgage demand, and tighten as the mortgage market
becomes more liquid and realizes economies of scale. Using MIRS data for April 1997
through May 2003, we estimate that the GSE funding advantage accounts for about seven
basis points of the 15-18 basis point jumbo-conforming spread.
Full paper (1554 KB PDF)
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Last update: January 14, 2005