Lenders are revisiting tools, programs, and practices that many believed were relics from a prior era. Adjustable-rate mortgages (ARMs), for instance, resurfaced as we ended 2025, not because they are inherently problematic, as some sensational coverage implies, but because today’s rate environment and affordability pressures make them relevant again. What should originators watch for as we enter into a new year?
When the economy softens and the yield curve begins to steepen, short-term rates typically fall, prompting borrowers to reconsider products that offer lower upfront payments. As we’ve seen with the Federal Reserve lowering overnight rates and grabbing headlines, longer-term rates (like mortgages) have been stubborn. In fact, 15- and 30-year mortgages have been in the same general range for three years.
ARMs have always cycled with the broader-rate landscape, and this period is no exception. Although Agency liquidity remains thin and most demand is still concentrated among banks and portfolio lenders, STRATMOR is seeing early signs of renewed appetite, especially in certain government 5/1 products where the rate advantage has widened at the lower end. The persistent obstacle, however, is still “hedgeability,” an area where adjustable mortgages and non-QM loans continue to present operational challenges, despite new vendors claiming solutions.
At the same time, loan-level price adjustments (LLPAs) have become a focal point across the industry. Capital markets teams cannot hedge against a change to LLPAs by Freddie or Fannie. Although the general public rarely encounters or understands them, LLPAs are fundamental to how mortgage credit risk is priced. They sit on top of the guarantee fee (G-fee) and calibrate the cost of a loan to its risk profile, charging more, for example, to lower-credit or higher-LTV borrowers.
Talk of the Federal Housing Financing Agency (FHFA) (which oversees Freddie Mac and Fannie Mae, also known as the GSEs,) revisiting the LLPA framework has reignited debate over whether the system should remain strictly risk-based or be used to subsidize certain borrower groups. This discussion has direct consequences on many borrowers since adjustments for second homes, cash-out refis, and investment properties influence everything from borrower decision-making to servicer behavior to the overall flow of credit across the housing ecosystem. The possibility of the GSEs eventually returning to public markets for funding further complicates matters, since major changes to their pricing structure raise questions about how investors would view the business model.
For lenders, LLPAs are not theoretical. They shape daily pricing decisions. Loan officers may dislike the LLPA pricing grids, but they know them well. Experience and servicing track records have shown why they exist. When a major correspondent buyer once chose not to apply an investor-property LLPA that competitors were using, it was quickly inundated with volume from borrowers seeking the path of least resistance. The market rarely misses a pricing anomaly, and it never hesitates to exploit one.
Hedging around LLPAs and credit policy changes introduces another layer of complexity. You can’t hedge against credit risk. Adjustments tied to servicing costs or borrower credit behavior are extremely difficult, at best, to hedge directly. One might attempt to model some of these factors into duration assumptions, but precision is limited. Broader policy revisions (such as changes to G-fees or eligibility rules) are even more challenging to defend against. These shifts also feed directly into refinance dynamics: lowering LLPAs for a given set of borrowers or loan attributes can dramatically increase prepayments, catching investors off guard if they priced pools under outdated assumptions. Credit-score thresholds behave similarly. A loan originated under one pricing regime may act very differently once the borrower falls into a new matrix.
This context helps explain the interest surrounding Fannie Mae’s move to eliminate minimum FICO requirements in Desktop Underwriter (DU). The change does not open the door to unlimited risk since DU still evaluates overall creditworthiness, and sub-640 borrowers have long been priceable under the LLPA schedule.
But it does mark a subtle change in approach. Depending on how mortgage insurance and lender overlays respond, some borrowers who previously defaulted (no pun intended!) to FHA financing may find conventional options more accessible. The practical distinction between a borrower with a 619 score and one with a 621 score is negligible, yet historically, pricing has treated these cutoffs as a “Berlin Wall.” Whether this shift meaningfully alters market share remains to be seen, but it reflects a broader trend toward evaluating credit more holistically.
Meanwhile, the government shutdown a few months ago disrupted the flow of critical economic indicators to investors and lenders. It may happen again this month as Congress wrangles overspending. The delayed reports are now surfacing, however, and while some thought that markets may overreact simply because uncertainty has accumulated, rates have barely budged. Concerns about the reliability of core data, especially payrolls and certain components used in calculating the Consumer Price Index, have already grown due to survey-response problems, methodological disputes, and large revisions. As confidence in traditional indicators erodes, alternative datasets become increasingly important. Many institutional investors already supplement federal statistics with private-sector measures of employment, wages, spending, and inflation. Over time, this multi-source approach is likely to become standard.
Against this backdrop, borrowers continue asking STRATMOR clients the familiar question: Should I lock now or wait? My guidance remains the same: lock once the file is ready. Short-term rate forecasting around Fed decisions, data anomalies, or political developments is rarely successful and not consistent. In fact, several recent rate-cut cycles have been followed by higher, not lower, mortgage rates in the days that followed. Markets move on expectations, not announcements. Pipeline hedgers are rewarded for managing exposure consistently, not for trying to time the next headline.
Looking across all of these developments (renewed interest in ARMs, potential LLPA revisions, evolving credit-score philosophy, data uncertainty, hedging challenges, and shifting policy signals), a common theme emerges: change is happening incrementally, but in many interconnected ways. Mortgage finance rarely transforms overnight. Instead, the system evolves through a series of small adjustments to pricing, credit, structure, and policy that collectively reshape the market over time. The lenders who will thrive are those who understand this interconnectedness and can adapt their origination, servicing, and hedging strategies accordingly.
STRATMOR has always believed that adaptation has continually been a defining feature of this industry. Today’s environment simply requires us to move with even greater agility. Chrisman
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