How might rising mortgage rates or potential Fed policy changes influence the sustainability of this volume growth?
Rising rates vs. Fed policy â what it means for the current volume surge
The ICE Mortgage Monitor shows a recordâhigh quarterly origination volume (the strongest since 2022) with purchase and cashâout refinance activity at threeâyear highs. That momentum is being driven largely by a tight supply of existingâhome inventory and a wave of ârateâlockâinâ behavior among borrowers who still view todayâs rates as âaffordableâ relative to the 5âplusâyearâhigh levels seen in 2023â24.
If mortgage rates continue to climbâwhether because the Fed holds the policy rate at the current 5.25â5.50% range, lets longerâterm Treasury yields drift higher, or signals a more hawkish stanceâtwo key dynamics will test the durability of the volume growth:
| Factor | Mechanism | Trading implication |
|---|---|---|
| Higher rates (rateâsensitive borrowers) | Cashâout refinances are the most rateâsensitive segment. A 25â50âŻbp rise in the 30âyr rate typically cuts cashâout demand by 10â15âŻ% and pushes borrowers toward rateâandâtermâswap products or even postpones moves altogether. Purchase volume can hold up longer if inventory remains scarce, but priceâtoâincome ratios will start to compress, reducing upside in homeâpriceâlinked equities. | Short highâbeta mortgage REITs (e.g., AnnalyâŻ(ANR), AGNCâŻ(AGNC)) and reduce exposure to homeâbuilder stocks that rely heavily on cashâout refinances (e.g., DR HortonâŻ(DRHO), LennarâŻ(LEN)). |
| Fed policy shift (rateâpause or cut) | A credible pause or a âsoft landingâ narrative would flatten the yield curve, keep the 30âyr rate near 6â6.5% and preserve the incentive for borrowers to refinance now rather than later. This would sustain cashâout volumes and keep the âtappable homeâequityâ metric buoyant. | Long banks with strong mortgage franchise (e.g., JPMorganâŻ(JPM), WellsâŻ(WFC)) and buy mortgageâoriginator ETFs (e.g., MORT) on any pullâback in rates. A Fedâpause also supports the broader equity market, especially rateâsensitive growth names. |
| Liquidity & credit spreads | Even if the Fed holds rates steady, widening credit spreads (e.g., 10âyr Treasury vs. 10âyr Treasuryâinflationâprotected securities) can raise the cost of capital for lenders, tightening underwriting standards and choking off volume. | Watch creditâspread indicators (TED spread, BAAâAAA spread). A widening spread suggests a defensive tilt toward highâquality, lowâduration loanâbooks and away from âhighâballoonâ cashâout deals. |
Bottom line for traders:
- If rates keep rising or the Fed signals a more aggressive stance, expect cashâout refinance volumes to decline sharply and homeâequityâlinked REITs to lose momentum. Position accordingly by shorting or trimming exposure to those highâbeta mortgageârelated securities.
- If the Fed pauses or hints at easing, the current volume surge is more likely to persist, especially in purchaseâoriginations, supporting a long bias on mortgageâoriginating banks and mortgageâoriginator ETFs while still keeping a watchful eye on inventory constraints and priceâtoâincome ratios.
Actionable watchâlist:
- Rateâsensitive REITs: ANR, AGNC â watch for 10âday movingâaverage cross of the 30âyr rate.
- Bank mortgage franchises: JPM, WFC, BAC â monitor loanâgrowth guidance in earnings calls.
- Homeâbuilder exposure: DRHO, LEN â watch for pullâback in cashâoutârefinanceâdriven upgrades.
Keep a close eye on the next FOMC minutes, CPI releases, and Treasury yield curve moves; each will either reinforce the current volume narrative or flag a turning point that could quickly erode the âquietly highestâ quarterly mortgage volume.