By Andrew Roth
This is a graph depicting the yield spread in conventional (under $417,000) vs. jumbo (over $417,000) 30-year fixed mortgages over the past 6 months.
For many years, the traditional difference in rate (or, yield spread) between these two mortgage products was approximately 0.375%. This premium is demanded by investors because, unlike conventional loans, jumbo loans are not purchased by the government-sponsored private corporations of Fannie Mae and Freddie Mac. As a result, jumbo loans are more risky to hold and trade in the secondary market. When investors grew weary of the risks in the “sub-prime” mortgage segment in August of this year, many investors exited the higher-dollar “prime” mortgage market as well, causing jumbo rates to increase to more than 1.00% over conventional rates.
Today, the retail yield spread between prime and conventional mortgages is approximately 0.6%, providing indications that investors are coming back into the prime mortgage market. Watch this trend over the coming months to gauge the health and recovery of the vital secondary mortgage market.