The first annual analysis of US mortgage overlay patterns, lender behavior trends, and approval climate intelligence. Free. Citable. Unreplicable.
The FRC Overlay Friction Index (OFI) completed a full tightening-expansion-retightening cycle between 2024 and mid-2026, driven primarily by secondary market conditions and rate environment shifts.
Scale: 0=no overlays · 100=extreme restriction. Source: FRC Research quarterly analysis.
The defining characteristic of the 2025-2026 period: maximum divergence between lender categories. The gap between VA specialists (OFI: 8) and conservative overlay lenders (OFI: 72) represents a 64-point spread — meaning the same borrower faces radically different approval landscapes depending solely on which lender they approach.
The most significant positive development of the 2024-2026 period: SSDI income acceptance has improved substantially, driven by fair lending scrutiny and clearer federal guidance.
FRC's first systematic classification of US mortgage denial types reveals that the majority of denials in the 45-57% DTI range and 580-639 credit score range are lender overlay denials — not agency rule denials. Borrowers in these profiles are frequently qualifiable at alternative lender categories without any changes to their financial profile.
Estimated distribution based on FRC taxonomy analysis. Overlay vs agency classification per FRC decision rule.
OFI expected to reach 50-54 by Q3 2026. Conservative overlay tightening continues. Non-QM expansion persists as offset. SSDI acceptance continues improving. Net: slightly more difficult for edge-case borrowers at conservative lenders, slightly easier at flexible categories.
OFI contracts toward 40-42. Liquidity improvement drives overlay loosening. Most favorable conditions for SSDI and 1099 borrowers since early 2022. Expansion phase characteristics return.
OFI rises toward 55-60. Conservative lenders implement additional credit and DTI overlays. Non-QM rate premiums increase. Edge-case borrowers face most restricted environment since 2023 peak.
The US mortgage market operates with a fundamental information asymmetry: lenders know their overlay rules in detail; borrowers rarely do. This asymmetry drives billions in unnecessary denials, wasted credit pulls, and lost home purchase transactions annually.
FRC's State of Underwriting 2026 documents this gap for the first time in systematic form — with the goal that mortgage professionals, researchers, regulators, and borrowers can make better decisions with complete information.
The next State of Underwriting will be published May 2027. Overlay data contributors are acknowledged in the full report.