Nonbanks drive agency ARM increase as borrower leverage grows

Adjustable-rate mortgages (ARMs) remain a minority of total agency originations, but they have reemerged in 2026. This time, independent mortgage banks (IMBs) and more leveraged borrowers are driving a rise in market share, according to Polygon Research.

The analysis, updated Monday by Polygon founder and CEO Val Buresch, found that ARMs rose to 3.34% of agency loans through the first six months of 2026, up from 0.31% during the same period in 2021. A total of 39,166 ARM loans were originated from January to May 2026, compared to 35,591 in all of 2021.

The report relied on Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities (MBS) loan data through May.

“Agency adjustable-rate mortgages are returning to relevance in a mortgage market defined by elevated rates, high home prices, and persistent affordability pressure,” Buresch wrote.

Market changes drastically

In 2021, five banks — Wells Fargo (6,013 loans), JPMorgan Chase (2,374 loans), Truist Bank (1,154 loans), Citizens Bank (762) and U.S. Bank (645) — ranked among the 10 largest agency ARM sellers/issuers.

But year to date in 2026, all of the top 10 sellers/issuers are nonbanks, with the top five positions held by PennyMac Loan Services (4,675 loans), United Wholesale Mortgage (3,786 loans), Freedom Mortgage Corp. (3,283 loans), Rocket Mortgage (2,887 loans), and Lakeview Loan Servicing (2,605 loans).

The Polygon Research analysis ties the shift, among other things, to the ability of IMBs to operate across retail, wholesal and correspondent channels, allowing them to move quickly on new products and scale when demand shifts.

Borrower profiles

From a borrower perspective, ARMs offer lower initial rates that can improve qualification, reduce early payment burden or allow for preservation of monthly cash flow, according to Buresch.

But the 2026 agency ARM borrower appears more stretched than in 2021 across several credit metrics. The average FICO score dropped 29 points to 737, the average loan-to-value rose from 64% to 79%, and the average debt-to-income (DTI) ratio increased 8.2 percentage points to 40.4%.

The near-zero equity segment has grown sharply. In 2021, just 0.4% of agency ARMs had LTVs between 97% and 100%. Year to date, that share is 15.7%, about 39 times higher. Combined with higher DTIs, this points to thinner borrower cushions if incomes fall, home prices soften or payments step up after the first reset.

“One structural feature of ARM pricing compounds that tension: the rate that gets quoted — by lenders, by the media, and in most borrower comparisons — is always the initial rate, regardless of how short the fixed period actually is,” Buresch wrote.

“A 1/1 ARM and a 7/1 ARM may be quoted at similar rates, but their risk profiles for a borrower planning to stay ten years are entirely different. When affordability pressure is the primary driver of product selection, as the 2026 borrower data suggests it is, that gap between the quoted rate and the true cost of the loan over time deserves particular attention.”

This article was written by Flávia Furlan Nunes and generated with the assistance of HousingWire Automation, then reviewed by a HousingWire editor before publication.