Federal deficit pressures, rising government debt and the ongoing Iran war are driving higher energy prices and broadening inflation, compounding affordability challenges facing borrowers as 2026 draws to a close.

Mortgage rates have climbed from around 6% in February to roughly 7.5% in early October, and relief may not come anytime soon.

“We’re expecting mortgage rates to stay over 7% for the next couple of years,” cautioned Marina Warsh, vice president and head of industry analysis at the Mortgage Bankers Association (MBA), speaking during an industry panel on Tuesday hosted by Housing Finance Strategies, an advisory firm founded by Faith Schwartz in 2016.

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The livestream brought together numerous housing finance experts to discuss pressing issues facing lenders, servicers and borrowers.

Warsh noted that typical 30-year rates may not decline to below 7% until 2029, citing a projected drop in total origination counts in 2027. Loan counts are unlikely to rise until 2029 as cost pressures persist.

“Payments at 7.5% are about 40% higher than payments at 3.5%,” explained Laurie Goodman, founder of Housing Finance Policy Center at the nonprofit Urban Institute, who also spoke on the panel. She pointed to the mortgage lock-in effect keeping housing turnover at multidecade lows leading to structurally lower mortgage demand.

Persistent affordability challenges have pushed home sales and mortgage production to multidecade lows since the Federal Reserve rapidly raised interest rates in 2022. Typical 30-year mortgage rates have been between 6% and 8% since, shifting the mortgage industry into a new environment of high home prices and high rates.

Liquidity risks from deteriorating affordability

Beyond significantly higher principal and interest payments, overall monthly housing costs — including property taxes, homeowners insurance and maintenance expenses — have risen roughly 32% over the past five years, according to a recent Zillow survey. Mounting housing costs are not only hurting lenders by shutting off new mortgage demand, however, the panelists said.

Higher total monthly housing costs have eroded ongoing affordability for existing borrowers, with particular strain on government-backed mortgages insured by the Federal Housing Administration and loans originated in the higher-rate environment post-2022.

Rising housing costs have contributed to higher delinquencies, while refinance production volumes have plunged. Specific and growing liquidity risks have emerged for lender-servicers sitting on large portfolios of government loans that are increasingly nonperforming, but for which they still must make advances to investors.

Meanwhile, refinance production is projected to fall to $430 billion in 2027 amid higher borrowing costs. Fitch Ratings has recently cautioned that servicing recapture strategies are forecast to struggle next year, underscoring potential liquidity risks as the prepayments they use to fund advances fail to materialize.

“This could be an issue in the next six months, not in the next two years,” said Walsh, noting how mortgage delinquencies tend to increase in the fourth quarter followed by updated escrow assessments being sent to many borrowers at the start of the year.

The conversation led Faith Schwartz, who moderated the discussion, to ask whether a longer-term shift to higher renter share and lower homeownership share was underway for younger homebuyers as affordability challenges prove enduring.

“Buying a horse is cheap,” responded Deb Jones, senior capital markets advisor at Citizen Bank, who sat on the panel. Keeping a horse fed, shoed and sheltered, however, is the much more expensive financial obligation to maintain, she emphasized.

“What is the generation looking at in terms of their mobility and their goals,” said Jones, “versus maybe settling down for a period of time in one spot.”