Non-QM Locks Rise as Mortgage Volume Falls; ARM Share Hits Seven-Year High

Share this article!

The mortgage market contracted sharply in September, but lenders serving borrowers outside traditional agency guidelines gained ground. New figures from Optimal Blue’s September Market Advantage report, released Tuesday, show overall rate-lock activity down 26% from a year earlier and 21% over three months. Non-qualified mortgage locks, by contrast, increased 8% from August.

Non-QM loans accounted for 12% of the September locks tracked by Optimal Blue, up nearly 4.8 percentage points from a year ago. Adjustable-rate mortgages reached 14% of locks, the highest share in the company’s series dating to 2019, compared with 10.5% in August. The changes offer an unusually clear view of how borrowers and lenders are adapting to higher rates.

Optimal Blue’s figures come from pricing, lock and secondary-market systems used by participating lenders. The company says its product-and-pricing engine touches more than one-third of U.S. mortgage locks. That makes the data useful for detecting shifts in lender pipelines, though the sample is not the same as a census of all closed mortgages. Lock counts and completed originations can diverge, especially when borrowers cancel or fail to qualify.

Purchase lending holds up better than refinancing

Purchase loans made up 82% of September lock activity. Purchase volume was down less than 1% from August and from a year earlier, although it had declined 20% over three months. Refinancing fell to 18% of the mix. Rate-and-term refinance locks plunged 82% year over year and 13% from August; cash-out volume was down 23% from a year earlier.

Those figures explain why the market’s headline contraction has not been evenly distributed. Homebuyers still need financing when a transaction moves forward. Existing borrowers with mortgages well below today’s rates have little financial incentive to refinance unless they need cash, must restructure debt or face another pressing circumstance.

Non-QM’s growth requires its own qualification. It is a broad category covering loans that do not meet the federal qualified-mortgage definition; it does not automatically mean subprime lending or loans made without underwriting. Optimal Blue said investor and debt-service-coverage-ratio loans accounted for 33% of its non-QM activity, bank-statement programs 30%, and other expanded-guideline products 37%. Each segment carries different documentation, repayment and investor risks.

The shift toward adjustable rates is also worth watching. An ARM may provide a lower initial payment than a comparable fixed-rate loan, but the borrower’s future costs depend on the contract’s reset schedule, caps and index. Optimal Blue’s 14% figure describes locks in its network, not the share of all outstanding U.S. mortgages carrying adjustable rates.

Rate shock reaches the secondary market

The company’s conforming 30-year fixed-rate index ended September at 7.39%, 67 basis points higher than at the start of the month. The 10-year Treasury yield finished at 5.29%, up 54 basis points. The difference between the mortgage index and the Treasury benchmark widened by 13 basis points to roughly 210, indicating that higher government yields were not the only source of pressure on borrowers.

In secondary marketing, the share of lender hedges in 5.5% uniform mortgage-backed securities fell from 62% to 50%, while 6% coupons climbed to 44%. Mortgage-backed-securities execution represented 47% of hedged loan sales, its highest share since January. These are measures of how lenders sell and hedge loans, not changes to borrowers’ note rates.

The movement fits a broader bond-market problem. As rates rise, borrowers become less likely to refinance, extending the expected life of existing mortgage securities. Reuters reported Monday that duration hedging associated with mortgage securities has contributed to selling pressure in Treasuries and swaps, though market participants disagree about how much of the yield increase can be attributed to those trades. The Federal Reserve’s expected policy path and the wider bond selloff remain major factors.

Optimal Blue’s servicing-rights metric barely changed despite the increase in rates: the conforming 30-year mortgage servicing rights measure rose one basis point to 1.39%, or a 5.57 multiple. Servicing retention on loan sales slipped to 56% from 57% in August. A change in mortgage rates therefore should not be assumed to produce an equal or immediate move in every component of lender profitability.

What the figures do—and do not—predict

The report’s proprietary forecasting model projects a conforming mortgage rate of 7.66% in one month, 7.80% in three months and 7.85% in 12 months. Those are model outputs, not quoted rates available to borrowers or a guaranteed path for the market. Energy prices, inflation readings, Treasury yields and changes in Federal Reserve expectations could alter them materially.

Other figures point to increasingly selective underwriting. The average locked loan amount rose to about $397,000. Average debt-to-income ratios for purchase borrowers were 37.1% on conforming loans, 44% on FHA and 43.8% on VA. Purchase pull-through—the share of locks that proceed to funded loans—fell 2.7 percentage points to 82.2%.

For lenders, the immediate implication is operational: fewer locks overall, more complex borrower profiles and a growing need to manage rate risk and product eligibility. For borrowers, the headline expansion in non-QM options does not erase the affordability problem. A product may fit a different income or property profile while still carrying a payment that must withstand close scrutiny.

Freddie Mac’s separate weekly mortgage survey reported a 7.40% average 30-year fixed rate on October 8, a later observation with a different methodology. WRE previously reported MCT’s September lock-volume decline. Tuesday’s Optimal Blue release adds a separate data sample, a breakdown of non-QM and ARM activity, and secondary-market measures unavailable in that earlier account.