The Effect of Housing Government-Sponsored Enterprises on Mortgage Rates

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. 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 tightens as the mortgage market becomes more liquid and realizes economies of scale. Using Mortgage Interest Rate Survey data for April 1997 through May 2003, we estimate that the government-sponsored enterprise funding advantage accounts for about 7 basis points of the 15–18 basis point jumbo–conforming spread.