A new spin on the jumbo/conforming loan rate differential

This article uses house-price transaction data to estimate volatility in ho use prices. The volatility parameter is an input into a mortgage-pricing mo del that is used to simulate the contract interest rate that balances the m ortgage contract. By segmenting the house-price transaction into high- and low-valued homes, we are able to estimate a theoretical jumbo/conforming lo an rate differential. Simulation results demonstrate that the differences i n volatility between high- and low-priced homes can produce a contract loan rate differential, holding all else constant. The article also presents a discussion of the problems inherent to estimating volatilities form assets with infrequent trades and long holding periods.