Outlooks for higher interest rates and further contraction in residential mortgage demand prompted Fitch Ratings to caution Friday that headwinds are building for nonbank mortgage companies.

“The outlook for mortgage rates, and therefore refinance volumes and originator earnings, deteriorated following the escalation of the U.S.-Iran conflict in March 2026 and the subsequent rise in U.S. Treasury yields,” the global ratings firm said in its sector analysis.

The report specifically cited dramatic revisions that Fannie Mae made to its housing finance forecasts earlier this month. That included sharply revising its previous forecast for typical 30-year rates of around 6.7% through the end of 2027 up to 7.5%.

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As a result, the government-sponsored mortgage investor is now projecting total single-family origination volume of just $1.86 trillion — an approximately 11% contraction in annual production and roughly 25% lower than its previous $2.5 trillion forecast from March.

Experts predict mortgage rates above 7% next year will exacerbate rate lock-in effects that have pushed sales and broader housing turnover to multidecade lows. Refinance production already facing structurally lower demand will likely contract further, with Fannie forecasting just $430 billion in refinances next year.

“Still, each year from 2024 to 2026 saw small refinance rallies as rates temporarily fell close to 6%, and Fitch does not expect operating results to similarly benefit in 2027,” the report stated.

Fitch’s latest commentary also indicates that shrinking production next year will continue to drive industry consolidation toward the sector’s largest originators and servicers.

Amid origination pressures, Fitch offered a bleak assessment of rising corporate leverage among the largest lender-servicers. Many of those lenders have issued debt in recent years to finance large purchases of volatile mortgage servicing rights (MSRs) to support longer-term servicing recapture strategies.

“MSR values rose to a peer average of 315% of tangible equity at [the end of the second quarter], highlighting significant exposure to valuation assumptions, including prepayment rates, delinquencies and float income,” said Fitch.

Corporate leverage, which Fitch defines as the ratio of non-funding debt to tangible equity, rose from 1.4% in 2021 to 2.5% in 2025. It had jumped to 3.1% through the midway point of 2026.