A late-month drop in mortgage rates did little to revive lending activity in October, with total rate-lock volume falling 19.2% from September and 37.6% from a year earlier, according to Optimal Blue's latest Market Advantage report.
Purchase locks declined 18% month over month and 17% year over year, a marked deterioration from September, when purchase activity was nearly flat on both measures. Refinances offered little relief, accounting for just 16% of October locks.
Yet borrowers who remained in the market were increasingly using adjustable-rate mortgages and government-backed financing. ARMs reached 17% of total lock volume, up from 14% in September and the highest share in Optimal Blue's data dating to 2019.
The figures point to a market where finding the right loan structure is becoming increasingly important, but even greater product flexibility isn't translating into more business.
Lower Rates, Fewer Locks
Optimal Blue's 30-year conforming fixed-rate index ended October at 7.15%, down 24 basis points during the month. Rates remained 99 basis points higher than a year earlier, however, limiting the incentive for existing homeowners to refinance.
Rate-and-term refinance locks fell 29% from September and 85% year over year. Cash-out refinance volume declined 22% monthly and 44% annually.
The weakness also extended to loan conversions. Purchase pull-through slipped to 81.4%, down from 82.2% in September, while refinance pull-through fell 6.15 percentage points to 68.5%.
October's monthly decline may partly reflect seasonal slowing, but the annual comparisons show that the weakness goes beyond the normal fall slowdown. Purchase locks were down 17% from October 2025, compared with a decline of just 0.4% in September's year-over-year figures.
The slowdown was uneven across major markets. Lock volume fell 27.7% in the San Francisco metro area and 23.8% in Washington, D.C., compared with declines of 7.5% in Seattle and 6.9% in San Antonio. Nationally, volume was down 19.2%.
ARMs and FHA Gain Ground
FHA loans accounted for 20% of October production, up 1.53 percentage points from September, while VA share increased to 11%. Conforming loans represented 46% of production.
“October’s data show how much affordability is shaping the purchase market,” said Brennan O’Connell, director of data solutions at Optimal Blue. “ARM share reached another high, FHA gained share and first-time buyers took a larger share across the major agency programs. For lenders, that means the opportunity is increasingly in helping borrowers find the product and payment structure that works for their circumstances.”
First-time buyers accounted for 70% of FHA purchase locks, 47% of VA locks, and 45% of conforming purchase locks.
Those figures offer an interesting contrast with the National Association of Realtors' latest buyer profile, which found that first-time buyers accounted for just 22% of home purchases.
The two reports measure different populations and periods. NAR's figures include cash purchases, while Optimal Blue tracks mortgage locks. Still, the comparison illustrates how important first-time buyers remain to lenders, even as their share of the overall housing market remains historically low.
Non-QM's Resilience Faces a Test
Non-QM loans represented approximately 12.2% of October rate-lock activity tracked by Optimal Blue, down 24 basis points from September but up 4.2 percentage points year over year.
That follows a stronger September, when Non-QM lock volume rose 8% despite a decline in overall mortgage activity.
October's figures suggest that momentum weakened. With total locks down 19% and Non-QM's share edging lower, the segment's lock volume also appears to have declined.
Investor and debt service coverage ratio (DSCR) loans accounted for 35.3% of Non-QM activity, up 6.11 percentage points from a year earlier. Bank statement loans represented 32.1%, down 2.73 percentage points, while other expanded-guideline programs accounted for 32.6%.
The shift suggests investor financing is taking a larger share of Non-QM business, even as the broader segment faces slowing demand.
Non-QM continues to account for a substantially larger share of the market than it did a year ago. But October serves as a reminder that gaining market share and growing production are two different things.
Lenders Face Tighter Execution Decisions
The slowdown also carries implications for lender profitability.
Best-efforts-to-mandatory spreads for conventional 30-year loans widened 15 basis points to 41 basis points, increasing the potential execution advantage of mandatory delivery for lenders equipped to manage the associated interest rate risk.
Meanwhile, the share of loans sold servicing retained declined from 56% in September to 53% in October.
“The jump in best-efforts-to-mandatory spreads shows investors are paying lenders more to take on interest rate risk. That makes best-efforts execution more expensive and a well-managed mandatory pipeline more valuable,” said Mike Vough, Optimal Blue's senior vice president of corporate strategy.
October's numbers reinforce the importance of having financing options beyond the standard 30-year fixed-rate loan. But with purchase locks down 17% from a year ago and refinances contracting even faster, a broader product menu can only do so much in a shrinking market.
Optimal Blue's findings are based on direct-source data from its pricing and lock platform, which the company says handles more than one-third of U.S. mortgage locks. The figures reflect pipeline activity rather than funded loans.
