A New Spin on the Jumbo/Conforming Loan Rate Differential
Posted: 24 Apr 2002
This paper uses house-price transaction data to estimate volatility in house prices. The volatility parameter is an input into a mortgage-pricing model that is used to simulate the contract interest rate that balances the mortgage contract. By segmenting the house-price transactions into high- and low-valued homes, we are able to estimate a theoretical jumbo/conforming loan rate differential. Simulation results demonstrate that the differences in volatility between high- and low-priced homes can produce a contract loan rate differential, holding all else constant. The paper also presents a discussion of the problems inherent to estimating volatilities from assets with infrequent trades and long holding periods.
Keywords: Mortgages, Government Sponsored Enterprises, Mortgage Rate Spreads, House Price Volatility
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