Mortgage-Backed Securities Insights — Week of February 16, 2026

Hi. I'm Jerry Levy, Managing Director of Texas Capital's Mortgage Securities Sales & Trading.

We begin the week 25 basis points lower in yield over the last two weeks, and are now close to the 2026 lows as mortgage rates are now sub-6% on an Optimal Blue mortgage news daily average. The basis is trading higher at 104 basis points into this rate rally, helped by the lowest bond market volatility since 2021 with the steepest yield curve this decade, and with those two are now combining to help MBS return the most in 24 years, last year 8.6%, and continuing for those positive returns to remain in 2026. 

Lower rates will translate into more refi flows. Total refi activity in 2025 was 315 billion, and 2026 is already forecast to exceed that by over 35%. And that is with rates here at 6%. If the two to three expected Fed cuts that are priced in for 2026 occur, we could reach 5.5% on the 30-year mortgage rates, and Fannie and Freddie continue to buy their announced 200 billion of mortgage-backed securities.

In an absolutely unexpected proposal from the Fed's regulatory team this week, Fed Vice Chairwoman for Supervision Michelle Bowman surprised the market with the plan to lower Basel risk weightings tied to mortgages. This is intended not only to free up bank capital to invest in MBS, but also lays the groundwork for regulated banking institutions in the U.S. to return to mortgage-backed security origination and servicing, with the goal of further lowering mortgage rates for consumers. Bowman explicitly expressed this sentiment: "This change could better align capital requirements with actual risk, support on balance sheet lending by banks and potentially reverse the trend of migration of mortgage activity to non-banks over the past 15 years." She added that: "Strengthening bank participation in these activities does not threaten the safety and soundness of the banking system." Combined, this would certainly enable regulated banks to return to origination and servicing and lower margin for the non-bank participants with which they would compete. 

We still have no update on Fannie and Freddie's IPO plans. The market is already starting to track the June 2026 confirmation hearings of Kevin Warsh as the next Fed chairman, as well as the November 2026 mid-term elections, for their impact on both interest rate and fiscal policy. Thank you for listening. Until next time.