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Zillow Research

The Jumbo vs. Conforming Credit Spread

With mortgage rates reaching another historic low, we were curious to see what the spread between the jumbo and the conforming rate was doing. As we explained in a previous post, the jumbo vs. conforming credit spread is the difference between the rates of a jumbo mortgage and a conforming mortgage. A conforming loan is a mortgage loan that conforms to the government-sponsored enterprises’ (GSEs) guidelines and can be sold to Fannie Mae or Freddie Mac.

Simply put, the spread between conforming and jumbo rates measures the effect GSEs have on the market and their role in reducing the risk associated with mortgage lending. GSEs reduce risk through the creation and maintenance of a secondary market that is very liquid for conforming loans.

In early 2006, this spread was below 40 basis points. In the months leading up to Lehman Brothers declaring bankruptcy in September 2008, the jumbo vs. conforming credit spread was right around 50 basis points. After that, it spiked to around 120 basis points and has seen plenty of ups and downs since then. In the middle of 2011, the spread came back down to around 50 basis points, spiked again right after the debt ceiling debate and the U.S. debt credit rating downgrade, decreased again slowly, and has lately been around 60 basis points. In the past few weeks it has started to come back down to the 50-basis-point territory. This can be seen in Figure 1, which shows the spread smoothed by a lagging three-week average. As we enter next year and GSE reform becomes a hotly debated subject, the jumbo-conforming credit spread will surely be discussed often.

The Jumbo vs. Conforming Credit Spread