Back in the first quarter of 2026, most mortgage lenders were anticipating lower interest rates and rising volumes. Then two things happened. First, the US, Israel and several Gulf nations, decided to start a war with Iran, a war that neither the US, Israel nor their Persian Gulf allies are in a position to win. 

More recently, the collapse of the AI bubble began to accelerate. By July, rating agencies started to downgrade names like Oracle. Credit default swaps spreads have started to blow out on many other tech names, causing spreads in Treasuries and the secondary market for mortgages to also extend. The result is a bear market in credit that has nothing to do with the FOMC. 

The ten-year Treasury note has risen by almost three-quarters of a point in yield since April, forcing 30-year fixed-rate mortgages up close to 7%. But more importantly, the perceptions of bond market investors have changed dramatically, with the expectations now being for higher long-term rates and wider spreads instead of another period of lower rates and higher lending volumes.

READ MORE: Home equity surge offsets slumping mortgage volume

The reversal in the bond market now confronts mortgage firms with some difficult choices. Many firms that had maintained excess capacity and headcount in anticipation of another down interest rate cycle are now forced to cut expenses in order to survive. The release of second quarter earnings for mortgage firms over the next several weeks will be a must-read for global investors. Look for some truly shocking results. 

One of the big changes since March has been the view of inflation by global investors. Since the start of the Iran war, prices for diesel fuel in the US have risen by more that 30% and far more in other nations. Prices for sulfuric acid and sulfur have trebled. Iran astutely targeted the production facilities in the Gulf that account for a significant global share of production capacity for fuels, liquefied gas and key industrial inputs like sulfur. 

Since the start of the Iran war, we have published two interviews in The Institutional Risk Analyst focused on energy supplies and the likelihood of higher prices in the second half of 2026 and beyond. Since the start of the Iran war, energy stocks in the US and around the world have dwindled, forcing governments such as Korea, India, China and the EU to adopt policies to curtail exports and protect domestic markets. 

READ MORE: Should lenders prepare for mortgage rates moving even higher?

Incredibly, there is virtually no discussion in Washington or in the American financial media about the approaching shortages of fuels and other products, and what this almost certain outcome means for inflation over the medium term. And right on time, the Bureau of Labor Statistics decided to alter how it measures several components of the inflation gauge watched by Fed.

Wishful thinking is the order of the day in Washington. Despite rising prices and falling levels of key energy stocks, Federal Reserve Chair Kevin Warsh told Congress that the Fed will make high inflation "a thing of the past."  He provided no signal about the central bank's next steps, however, and indeed said very little.

Fed policymakers "have no tolerance for persistently elevated inflation," Warsh said in his first appearance before Congress since becoming chair, replacing former chair Jerome Powell. "And we share a resolute commitment to restoring price stability," he intoned. 

Many mortgage lenders may still hope for lower interest rates next year, but the fact is that the most global central banks are marginalized as bond investors pushed yields higher. The vast amount of debt issued by tech firms in the AI sector may have broken the credit markets.

The real question we ask, of course, is how can the FOMC even talk credibly about a 2% inflation target when the Treasury is running a fiscal deficit of 6% of GDP?  Warsh needs to raise interest rates and soon to regain some relevance to the economic narrative.

READ MORE: Budget for 6.3% rates through 2027, Fannie Mae warns

"The message from sovereign bond markets is unmistakable," writes Komal Sri Komar. "Major central banks are not leading investors through policy pronouncements and decisive actions. They are following markets that have already reached their own conclusions."

The uncertainty in the bond market has manifested itself in growing volatility in the mortgage complex. "Boy.....that escalated quickly," wrote Adam Quinones of dataQollab last week. "I mean, that really got out of hand fast. Extension risk, realized! Mortgage convexity reminded the entire rates complex who's the boss this week."

The message to the mortgage market is very simple: Interest rates are likely to remain higher for longer, pushing volumes and, eventually asset prices down further and delinquency rates higher. Companies that do not quickly move toward at least break even in terms of operating results may find themselves in difficulty.

Larger players such as loanDepot and United Wholesale Mortgage, for example, have been reporting operating deficits for some time in their filings with the SEC. Will the prospect of 7% fixed rate mortgages force these perennial loss leaders to trim expenses and cut overhead?  

READ MORE: Mortgage credit at its tightest since December 2025

Take loanDepot, for example, which actually increased operating expenses in Q1 2026 compared with the same period last year, ostensibly to prepare for falling interest rates and higher volumes? Personnel expenses at loanDepot rose almost 20% in Q1 2026 vs the year before.

Market leader United Wholesale Mortgage raised over $500 million in cash in Q1 largely by selling mortgage servicing rights. The stocks of both loanDepot and United Wholesale are near 52-week lows.

Inflationary pressures will build as the year progresses because of growing shortages of fuel and key commodities. Both bank and nonbank lenders are going to be faced with the prospect of higher long-term interest rates, and higher funding costs, going into next year and also the prospect of greater market volatility. How quickly things change.