Working Paper

The effect of housing government-sponsored enterprises on mortgage rates


Abstract: 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 (the jumbo-conforming spread). 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 tighten as the mortgage market becomes more liquid and realizes economies of scale. Using MIRS data for April 1997 through May 2003, we estimate that the GSE funding advantage accounts for about seven basis points of the 15-18 basis point jumbo-conforming spread.

Keywords: Government-sponsored enterprises; Mortgage loans; Interest rates;

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2005

Number: 2005-06