Refinance retention by mortgage servicers broadly weakened in the third quarter, representing a missed opportunity as cash-out demand remained resilient despite surging mortgage rates, new industry data shows.

As average 30-year mortgage rates increased to 6.86% in September, according to Freddie Mac data, prepayment activity dropped to its lowest monthly reading since early 2025.

Rate-and-term refinance prepayments that have plunged more than 80% from four-year highs set in March largely accounted for that slowdown, said ICE Mortgage Technology in its latest mortgage market report.

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“Traditional rate-based retention strategies aren’t effective for borrowers who are motivated by access to equity rather than interest rate savings,” said Bob Hart, president of the mortgage technology division at parent company Intercontinental Exchange Inc.

The real estate data and servicing platform provider said mortgage servicers retained 27% of refinancing borrowers in the third quarter, a drop of four percentage points from the prior quarter. Rate-and-term retention declined nine percentage points to 30%.

Mortgage rates are broadly expected to remain above 7% next year, setting up refinance originations for even lower volumes than 2026. Amid four consecutive years of nominal home sales and sustained low refinance production, some industry experts have flagged liquidity concerns heading into next year as prepayment activity remains muted.

Cash-out retention was flat over the quarter at 26%. However, servicers only retained about 15% of cash-out candidates with loans originated from 2019 or earlier.

“To retain these borrowers, servicers need better visibility into their equity positions and the ability to engage them before they look elsewhere,” added Hart.

The number of active mortgages carrying rates below 4% declined to 49% as of the end of the third quarter — down from 52% a year ago and the first time below half since the second quarter of 2020. More than 1 in 5 loans had a rate below 3% as of the end of September, according to ICE’s data.

“Runoff remains slow,” noted the report, citing 1.9 million fewer mortgages with sub-4% rates at the close of the third quarter compared to last year. “If 2026 patterns held, they would still be about 45% of active mortgages next year and about one third in five years.”