The Jumbo/Conforming Spread


Standard & Poor’s issued a research report, What Drives the Variation Between Conforming and Jumbo Mortgage Rates? It opens,

What drives the variation between the conforming and jumbo mortgage rates for the 30-year fixed-rate mortgage (FRM) product offered in the U.S. residential housing market? While credit and interest rate risk are the main factors at play, S&P Global Ratings explores how these risks relate to capital market execution and whether this relationship translates into additional liquidity risk. In our study, we compare the historical spreads between the two average note rates over time, and we also examine the impact of certain loan credit characteristics. Our data indicate that the rate difference grows in periods for which the opportunity for securitization declines as a viable exit strategy for lenders. (1)

My main takeaways from the report are that (1) the decrease in securitization since the financial crisis has contributed to a wider spread between jumbo and conforming mortgages; (2) the high guaranty fee for conforming mortgages pushes down the spread between jumbo and conforming mortgages; and (3) the credit box appears to be loosening a bit, which should mean that jumbos will become available to more than the “super-prime” slice of the market.

What’s Pushing Down The Homeownership Rate?

USDA New Homeowner

S&P has posted a report, What’s Pushing Down The U.S. Homeownership Rate? It opens,

Seven years after the Great Recession began, a number of key economic factors today have reverted from their short-term extremes. Home prices are rebounding, unemployment is declining, and optimism is rising ­­among economists if not among financial markets­­ that the U.S. economy may finally be strong enough to withstand a rate hike from the Federal Reserve. All these trends point to reversals from the recession’s dismal conditions. Even so, one telling trend for the nation’s economy hasn’t yet reverted to its historic norm: the homeownership rate. The rising proportion of renters to owner ­occupants that followed the housing market turmoil has yet to wane. Compound this with tougher mortgage qualifying requirements over recent years, and it’s not surprising that the homeownership rate, which measures the percentage of housing units that the owner occupies, dropped to a 50­ year low of 63.4% in first­ quarter 2015. However, the further decreases in unemployment and increases in hourly wages that our economists forecast for the next two years may set the stage for an eventual comeback, if only a modest one. (1)

S&P concludes that many have chosen not to become homeowners because of diminished “mortgage availability and income growth.” (8) Like many others, S&P assumes inthat the homeownership rate is unnaturally depressed, having fallen so far below its pre-bubble high of 69.2%. While the current rate is low, S&P does not provide any theory of a “natural” rate of homeownership (cf. natural rate of unemployment). Clearly, the natural rate in today’s economy s higher than something in the 40-50 percent range that existed before the federal government became so involved in housing finance.  And clearly, it is lower than 100% — not everyone should be or wants to be a homeowner. But merely asserting that it is lower than its high is an insufficient basis for identifying the appropriate level today.

I think that the focus should remain on income growth and income inequality. If we address those issues, the homeownership rate should find its own equilibrium. If we push people into homeownership without ensuring that they have stable incomes, we are setting them up for a fall.