Private capital is returning to the mortgage market

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Shrinking spread between jumbo and conforming mortgages is a positive indicator

Ben Lane
April 11, 2014 2:02PM

The spread between jumbo and conforming mortgages is shrinking. And that’s a good thing for the mortgage market. It means that private capital is coming back into the market, according to analysis from Capital Economics.

“We think that the decline in the jumbo-conforming mortgage interest rate spread is a positive sign for the future of the mortgage market,” Capital Economics Property Economist Paul Diggle said.

The spread between jumbo and conforming mortgages has progressively fallen since the early part of 2013, even turning negative for a brief period in February. Diggle says this is due to two factors:

  • The guarantee fees which Fannie Mae and Freddie Mac charge lenders for buying or guaranteeing mortgages, and which lenders pass on to borrowers in the form of higher rates, have increased. Put-back risk, as well as a 10-basis-point premium mandated by the Treasury, has been behind the rise in guarantee fees. But guarantee fees do not apply to jumbo mortgages, meaning that the increase in fees has served to close the jumbo-conforming spread.

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