2026 Setup: Falling Rates Could Spark a Major Refi Revival

Key Concepts

• FICO Scores
• Loan Rates
• Disinflation
• Federal Reserve Policy (Dovish)
• Interest Rate Steepening
• Refinancing Wave
• Mortgage Activity (Refi vs. Purchase)
• Housing Exposure

Impact of Loan Rates on FICO

Historically, both FICO's revenue and stock price have shown a strong correlation with changes in loan rates. This relationship is a key factor in understanding FICO's future performance.

Economic Outlook and Monetary Policy

The current economic environment is characterized by disinflation and a shift in Federal Reserve policy towards a more dovish stance, particularly anticipated in the first half of next year. This dovish tilt is expected to exert downward pressure on long-term interest rates.

Interest Rate Dynamics and Refinancing Potential

• Front-end Rates: A projected increase of approximately 150 basis points (1.50%) on the front end of the yield curve is anticipated.
• Back-end Rates: The back end of the yield curve is expected to see about half that increase, around 75 basis points (0.75%).
• Steepening: This differential movement suggests a potential for yield curve steepening.
• Refinancing Wave: The combination of these rate movements, coupled with changes observed over the past 12 months, is expected to trigger a significant refinancing wave.

Mortgage Refinancing Activity

• Historical Context: About a year ago, refinancing activity was down 90% compared to its levels in 2020-2021.
• Recent Improvement: Over the last 12 months, refinancing activity has doubled, meaning it is now down 80% from its peak.
• Upside Potential: Despite the improvement, there remains substantial upside potential for refinancing.
• Target Mortgages: A large number of mortgages with "six handle" interest rates (meaning rates starting with 6%) are available for refinancing.
• Purchase Activity: Any uptick in purchase activity will further contribute to FICO's business.

FICO's Position for the Near Future

Based on these economic and market dynamics, FICO is well-positioned for growth, particularly in the first half of next year. The company stands to benefit from increased refinancing and potential purchase activity.

Housing Exposure for 2026

The housing exposure angle for 2026 is highlighted as a particularly interesting area to monitor.

Conclusion

The analysis suggests that a confluence of factors, including disinflation, a dovish Federal Reserve, and anticipated interest rate movements, will likely lead to a substantial increase in mortgage refinancing activity. FICO, with its direct correlation to loan rates and its role in the credit ecosystem, is expected to benefit significantly from this trend, especially in the first half of the upcoming year. The housing market's performance in 2026 is also identified as a key area for future observation.