Higher mortgage rates are expected to lead to fewer originations through 2027

Is another hike on deck?

Mike Fratantoni, MBA’s senior vice president and chief economist, said after last week’s Federal Reserve rate hike that lenders had already “baked in the expectation of hikes at this and future meetings.” He noted that annual inflation — which held firm at 3.4% in August, according to the Consumer Price Index — remains above the Fed’s 2% target and that further increases are expected.

“Housing and mortgage activity slowed abruptly as mortgage rates moved higher over the past several weeks. MBA forecasts two additional hikes from the Fed over the next year and expects mortgage rates to stay near current levels over the forecast horizon,” Fratantoni said in a statement.

In his weekly video series, Dan Ribler, vice president of capital markets and strategy for Longbridge Financial, reminded reverse mortgage originators that the Fed does not directly set mortgage rates. Instead, long-term rates for home loans closely track the 10-year Treasury yield, which has been on the rise of late.

“Sometimes, what the Fed does on the front end has a dramatic effect on the market’s expectation for inflation. In September of 2026, it does not, and I can prove it,” Ribler said last week. “On Wednesday, the Fed spoke, and markets didn’t really move. Bond yields bounced around a little bit, but they ended up closing basically where they were before the Fed spoke.

“On Thursday, however, oil opened lower and rates came down. This is the market saying the price of oil — as a for instance — has a much bigger impact on long-term rates because it has a much bigger impact on inflation than where the Fed sets the overnight rates. The market is telling us oil prices, in this instance, are driving long-term rates, and the Fed is the passenger princess.”

Interest rate traders are currently divided on the Fed’s next move at the end of October. According to the CME Group‘s FedWatch tool, about 47% believe the federal funds rate will stay at its current range of 3.75% to 4% in October, while 53% say there will be another 25-bps hike.

Higher rates expected to curtail volumes

The two additional hikes expected by the MBA in the next year are tied to a decline in the trade group’s originations forecast. In its latest projections released last week, it called for 2027 origination volume of $2.101 trillion, down from the $2.144 trillion forecast in August and below the $2.123 trillion total expected for 2026.

Fannie Mae also cut its estimates for this year and next. The government-sponsored enterprise said last week that it anticipates single-family mortgage originations of $2.121 trillion in 2026, down from an estimate of $2.168 trillion in August, while its 2027 forecast shrank from $2.294 trillion to $2.279 trillion

Large lenders like Pennymac Financial Services have also indicated that higher rates are expected to take a toll on closed loan volume. The company released preliminary data showing that it closed $16.6 billion in loans for July and August, a run rate that would put it roughly 28% below its second-quarter performance.

“With mortgage rates up 50 basis points from June 30, pretax income will be lower than 2Q2026 primarily due to a decline in pull-through adjusted lock volume,” PennyMac explained in a filing with the Securities and Exchange Commission.

Commentary published last week by Keefe, Bruyette & Woods (KBW) pointed to reduced FHA lending volumes in July across the purchase and refinance spectrums. But the analysis also pointed to positive news for servicers as delinquencies in the FHA space, “which increased meaningfully after changes to the FHA modification rules last October, appear to be stabilizing.”

As a higher-for-longer rate environment continues, home equity lending could be a potential lifeline for lenders seeking new product options and homeowners who don’t want to touch their low-rate first liens.

In a report released earlier this month, Cotality concluded that “borrowers in the U.S. have never been in a stronger financial position.” Among homeowners with mortgages, aggregate equity reached $17.9 trillion in the second quarter of 2026. That pushed the average loan-to-value (LTV) ratio down to 44%, while only 2.1% of mortgages are considered underwater with debt that exceeds the property’s value.

Cotality also explained that about 93% of borrowers have LTVs below 80%, meaning they aren’t likely to be constrained by private mortgage insurance requirements.

“The central challenge is affordability, not leverage,” Selma Hepp, chief economist at Cotality, said in a statement. “The other side of that stability is that $11.5 trillion in tappable equity went largely untouched last year, with less than 2% withdrawn. … Housing wealth is therefore accumulating more than circulating.”