Key facts
- Mortgage origination volumes are expected to decrease due to higher interest rates.
- Pennymac Financial Services reported a preliminary funding of $16.6 billion for July and August, down from $34.9 billion in the second quarter.
- The average 30-year conforming loan rate was 7.28% on Tuesday, up 22 basis points in the prior two weeks.
- The Mortgage Bankers Association expects two additional Fed hikes over the next year and mortgage rates to hover near 6.7%.
- Keefe, Bruyette and Woods analysts project the 10-year Treasury at 4.75% through year-end 2026 and into 2027.
Mortgage lenders are bracing for a more challenging period as rising interest rates impact the U.S. economy, with preliminary third-quarter financial results already indicating a slowdown. Higher rates are expected to significantly reduce mortgage origination volumes.
Kevin Heal, managing director and senior finance analyst at Argus Research, stated that if current rate levels persist, origination could decrease by at least 5% in the third quarter compared to the second. Pennymac Financial Services provided an early indication of this trend, reporting preliminary funding of $16.6 billion for July and August, a substantial drop from the $34.9 billion recorded in the second quarter, suggesting an approximate 28% decrease in monthly production. The company also anticipates its production revenue margin to be between 75 and 85 basis points, slightly down from 77 basis points in the prior quarter. In an SEC filing, Pennymac attributed the expected lower pretax income primarily to a decline in pull-through adjusted lock volume, driven by a 50 basis point increase in mortgage rates since June 30.
Mortgage rates have been climbing, influenced by longer-term yields that have risen due to renewed inflation concerns and other economic pressures. The Federal Reserve's recent decision to raise its benchmark rate by 25 basis points, the first increase since 2023, further contributes to the upward pressure on borrowing costs. The average 30-year conforming loan rate stood at 7.28% on Tuesday, a 22 basis point increase over the preceding two weeks, and was 7.23% as of Friday.
Federal Reserve officials have signaled the possibility of further rate hikes, with markets pricing in additional tightening over the next year. Mike Fratantoni, chief economist at the Mortgage Bankers Association (MBA), noted that longer-term rates, including mortgage rates, had already factored in expected hikes. He added that housing and mortgage activity has slowed abruptly as rates have risen in recent weeks. The MBA forecasts two more rate increases in the coming year and anticipates mortgage rates to remain near 6.7%. Their outlook for 2027 origination volume is $2.101 trillion, a decrease from previous forecasts and below the 2026 expectation.
Fannie Mae economists project $2.279 trillion in originations for 2027, assuming similar rate levels. Analysts at Keefe, Bruyette and Woods (KBW) have revised their baseline estimate to account for two additional rate hikes through 2027 and a flatter yield curve, now projecting the 10-year Treasury at 4.75% through year-end 2026 and into 2027, up from a previous forecast of 4.4%. This outlook suggests mortgage rates could stay around 6.5%. KBW analysts believe long rates may remain range-bound, potentially trending down modestly once the Middle East conflict concludes, which would likely keep mortgage volumes subdued.
In this environment, lenders with strong liquidity, substantial servicing portfolios for stable fee income, and a focus on home equity lending are expected to be better positioned to navigate the slowdown. Heal noted that while home equity lending might offer a small boost, the amounts involved are considerably smaller.