Journal of Real Estate Finance and Economics, 25:2/3, 197±213, 2002
# 2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
AReconsideration of the Jumbo/Non-Jumbo Mortgage
JOSEPH A. MCKENZIE
Deputy Chief Economist, Federal Housing Finance Board, 1777 F Street, N.W., Washington, D.C. 20006, U.S.A.
Consistent with a series of recent papers, the interest-rate differential between mortgages eligible for purchase
based on loan size by Fannie Mae and Freddie Mac and larger loans is estimated to be 22 basis points over the
1986±2000 period. This differential averaged 19 basis points for the 1996±2000 period. Other signi®cant effects
include: loans slightly above the conforming loan limit and originated late in a calendar year often have a lower
rate that nearly fully anticipates their likely characterization as a non-jumbo loan after the conforming loan limit
is indexed effective each January; loan-to-value ratios affect jumbo loan rates much more than they affect non-
jumbo loan rates; loans located in non-metropolitan areas have a 3 basis point differential versus loans in
metropolitan areas that is surprisingly small given the likely higher cost to service non-metropolitan loans and the
higher degree of uncertainty about non-metropolitan collateral values; and estimated regional mortgage rate
differentials have narrowed through time.
Key Words: mortgage rates, jumbo mortgages, government-sponsored enterprises
Recently, Fannie Mae and Freddie Mac have received heightened attention from Congress,
the Treasury Department, and mortgage and capital market participants. While there may
be different motives for this additional scrutiny, certainly two major factors are the
dominance of these two enterprises in the conforming conventional mortgage market and
their corresponding presence in the capital markets arising from their need to fund the
mortgages and mortgage-backed securities they purchase. Key to an evaluation of the
public bene®ts of these two enterprises is a quanti®cation of their effect on mortgage
The usual linkages are that Fannie Mae and Freddie Mac have perceived capital market
advantages, resulting in a cost of funds lower than they would otherwise face.
thus, able to purchase mortgages at lower net yields. Since some mortgage originators sell
most or all of their production to these enterprises, all lenders must price mortgages taking
into account these posted yields. Thus, most conforming borrowers should bene®t from
lower mortgage rates, even if their loan is not sold to one of the enterprises. Competition in
*An earlier version of this paper was presented at the 2001 Annual Midyear Meeting, American Real Estate and
Urban Economics Association, Washington, DC, May 29, 2001. The opinions expressed in this paper are those of
the author and not necessarily those of the Federal Housing Finance Board or its staff.