Last week, my colleague Cameron gave you this nice primer on the mortgage interest deduction and who it really benefits. Today, we’re going to take this topic one step further (on the sell-side) and discuss government intervention in the mortgage market.
The Jumbo Mortgage Spread
The government has three direct mechanisms (and many indirect mechanisms) for propping up the mortgage market, especially at the bottom of the market: Fannie Mae and Freddie Mac, which are ostensibly independent Government Sponsored Entities, and the Federal Housing Administration (FHA), which makes no pretense to be independent. In all cases, that particular entity can step in and re-insure mortgages which take a certain form. There is a limit to this program – known as the conforming mortgage limit – over which all mortgages have to be originated and held in the private market.
See where I’m going on this? Because the next dollar of mortgage pushes a mortgage onto the private market, we can gauge either:
- The rate of government intervention
- The amount of fear in the private market
… depending on your political leanings and biases! Believe it or not, historical non-conforming mortgage loans are a tough data set to track down, so thanks for the Federal Reserve Bank of San Francisco for breaking through those paywalls for me.
Interpreting the Jumbo-Conforming Spread
So, we’re currently looking at around a .75% rate spread (the red line), which until recently was tracking around .25%… especially in the bubble run-up. The spread in early 2009 is of great interest here, since a 2% spread would strongly discourage buyers of houses to take out mortgages larger than the mortgage limit. Even today, the spread is hanging around a larger amount than what is normal. That’s right – nonconforming loans aren’t seeing as incredible deals as loans in the lower tier (which actually covers a majority of houses) today.
So… increased government intervention? Failure of the private market? Can’t decide and think it’s both? Sound off in the comments section!