The FRC Overlay Friction Index measures aggregate overlay strictness across US lender categories on a 0-100 scale, where 0 represents full agency minimums and 100 represents extreme restriction.
| Period | OFI Value | Direction | Primary Driver |
|---|---|---|---|
| Q4 2025 | 38 | → Stable | Rate environment stabilizing |
| Q1 2026 | 41 | ↗ +3 | Conservative banks beginning to tighten |
| Q2 2026 | 47 | ↗ +6 | DTI overlay compression at large lenders |
The 6-point increase in Q2 represents the largest single-quarter rise since Q3 2023. Conservative overlay lenders show decision drift toward stricter DTI caps, while portfolio and Non-QM categories moved in the opposite direction.
DTI caps at large national banks showing compression from the 50% range toward 43-47%. Reserve requirements elevated. Credit floor overlays holding at 640+ for FHA products. Documentation burden increasing for 1099 income borrowers.
Agency minimums (580 credit, 57% DTI) remain intact. However, several FHA-approved lenders have added 600-620 credit overlays. SSDI gross-up still widely applied. Manual underwriting availability stable.
Bank statement programs expanding. 12-month income history accepted at increasing number of programs (historically 24 months). Rate premium vs agency products narrowing from ~1.2% to ~0.75-0.90%. Strongest positive drift of any category.
Residual income methodology providing effective override for high-DTI veteran borrowers. VA disability income grossing up well. 0% funding fee for disabled veterans remains significant advantage. No meaningful overlay drift detected.
SSDI income acceptance continues to improve, driven by increased fair lending scrutiny of income-type overlays. Estimated 71% of lenders now applying agency-standard gross-up (FHA: 15%, conventional: 25%), up from ~58% in Q4 2024. Approximately 29% still maintain SSDI restrictions below agency minimums — an active overlay area.
A consistent pattern in Q2 data: borrowers with 45-52% DTI, 600-630 credit scores, and SSDI or 1099 income are being denied by conservative overlay lenders but approved at FHA-focused and portfolio lenders. The same borrower profile shows dramatically different approval topologies across categories — the core insight that FRC's Reverse Underwriter surfaces.
If the current rate environment persists (6.5-7.0%), expect OFI to reach 50-54 in Q3 2026 as large lenders continue overlay compression. Non-QM expansion likely to continue. Watch for regulatory pressure on SSDI overlay denials — this could accelerate SSDI acceptance improvement.
OFI calculated from agency guideline comparison across 7 lender categories, anonymous denial data submissions via FRC platforms, and 23-year underwriting pattern observation. Indices represent typical market behavior — not specific named lenders. Educational analysis only.