The jumbo mortgage market is for loans that Fannie Mae and Freddie Mac do not purchase because they exceed the conforming limit. Lenders assign a higher rate to jumbo loans for this reason. The interest rate “spread,” or the difference between the rates on a 30-year jumbo loan and a 30-year conventional loan, has remained relatively constant. However, it changed quite recently. Previously, the spread used to hold steady at 0.22 percent or 22 basis points. As of October 3, 2011, the 30-year fixed-rate conventional loan fell to 3.84 percent. The 30-year fixed-rate jumbo loan stood at 4.22 percent, a difference of 0.38 percent or 38 basis points.

The spread between the two 30-year loans widened from 22 to 38 basis points. What this means is unclear, except perhaps that the downward pressure from the Federal Reserve is being transmitted more effectively in the conventional loan market. The 15-year conventional loan stood at 3.3 percent as of October 3, while the 15-year jumbo rate loan stood at 4.11 percent, a difference of 0.81 percent or 81 basis points. The spread is even wider between the two 15-year loans. While such low jumbo mortgage rates may prove tempting to homeowners wishing to refinance, the conditions in this market have changed.

The raised conforming limit expired to reflect continued home price depreciation across the United States. The downward pressure from the Federal Reserve’s zero interest rate policy (ZIRP) and the announced Operation Twist will continue to put downward force on low mortgage rates. Generally speaking, a wider interest rate spread reflects a worsening economy. In 2008, the spread rose above 100 basis points, reaching 136 basis points in July of that year. Downward pressure ZIRP, Operation Twist and low yields on government bonds may send jumbo mortgage rates downward, narrowing the spread again.