That was fully expected. From an MBS trader point of view, large loans behave quite differently from small loans (they have different prepayment characteristics), so the bids in the secondary market reflect that. Therefore, one ends up with 3 categories of MBS:
– under $417K: no credit risk (covered by GSEs), low prepayment risk
– between $417K and $730K: no credit risk (still covered by GSEs), but high prepayment risk
– above $730K: both credit risk and prepayment risk
Prices (and, therefore, rates) simply reflect this reality.
