Investors are expressing more concern about slipping credit quality in the non-agency market, particularly due to how the loan packages are being handled.
Performance of non-QM mortgages has declined on a month-to-month basis on loans tracked by dv01, a unit of Fitch Ratings. The primary market is delivering incomplete loan files to the investors, both for qualified and non-qualified mortgages, said Craig Riddell, executive vice president of market development at LoanLogics.
"They are missing content, whether it's a document or the document is unsigned, or they put the wrong document in the wrong loan," Riddell said. "That is, and has been for the probably 18 years we've been doing what we do, it's been the No. 1 issue, and it's frankly no better than it was 10, 15 years ago."
North of 30% of all loan files, both QM and non-QM are incomplete, Riddell said. It is the No. 1 condition found.
Packages missing items or stuff being out of place is common. "I wouldn't have a job if they didn't," said John Toohig, head of the whole loan trading group at Raymond James.
In his role, he primarily deals with the banks, not so much with mortgage companies.
The bank side is heavily regulated and to him "it feels like there's three different sets of eyes on due diligence and underwriting these days."
Even with this level of scrutiny, "things always slip through the cracks," Toohig explained. "We'll do scratch and dent trades because docs are missing or something didn't come back right, but that's the exception, not the rule."
Today's new generation of underwriters work with what he termed a checklist, referring to a discussion at the panel
But issues creep up "the moment you get outside of the box and you have to actually think about kind of layering of risks or old school underwriting," Toohig said. "That's an art that's been lost by this generation of underwriters because they just follow their checklist. They can't necessarily think outside of the credit box anymore."
The title insurers with whom Kriss Law/Atlantic Closing & Escrow works with have spoken with President and CEO Scott Kriss stating they have seen more issues with non-QM, not necessarily document related. For example, they have seen some stuff around the borrower's credit score and as a result, they could be paying out more claims on that paper.
These packages tend to have more documents than a conventional mortgage.
"Those files tend to be slightly more complicated," Kriss said. "You have investors, you have the profile of that borrower, so things aren't generally as smooth and as fit into a box as they can be with a QM."
Kriss/Atlantic has its own post-closing department. This comes from years of experience and coming to the realization that the back-end, sales-wise for a settlement services provider, is almost as important for the business as the front-end is, Kriss said. It does have a separate set of procedures it applies to non-QM, especially in post-closing.
Unlike conforming mortgages, non-agency packages can vary lender-to-lender, with each having its own requirements (although many say they do follow agency guidelines in this area).
This being said, Kriss, who is a long-time veteran, recalled seeing much worse in the market when it came to package quality, especially in the early 2000s.
Now that TRID has been in place for a while, the market has gone from everyone crossing their t's to a bit of easing in compliance, he noted.
Concerns around collateral
But when it comes to non-QM, LoanLogics has growing concerns around the collateral. In particular, Riddell said it is finding some fraud around the appraisal and the collateral decisioning.
"Because so much is driven by the
But today's tools like the desk appraisal review and the traditional validation processes are insufficient to deal with the fraud creeping into the underwriting process. So underwriters and due diligence providers who work with non-QM lenders now are actively looking for more information and data around the property, including comps, Riddell said, than in the last 10 years or so.
"They want as much content as they can get, and those elements are going to be required a little bit more heavily in the non QM than in the QM space," he declared.
How non-QM mortgages have performed
The May performance of non-QM mortgages has declined on a month-to-month basis on loans tracked by dv01, a unit of Fitch Ratings.
In its early performance snapshot, the 30-day-plus impaired rate (includes loans in delinquency and modified) was up 30 basis points over April to 6.73%. The 90-day rate was also higher but by not as much, to 3.62%, a gain of 18 basis points.
For delinquencies only, the 30-day or more rate of 6.14% in May represented a month-to-month gain of 20 basis points. But the increase was spread across the buckets: 30-to-59 day was 5 basis points higher, while 60-to-89 days and 90 days or more each had a 7 basis point increase over April.
Among newly reported delinquencies, May's rate of 1.29%, up by 17 basis points from the prior month. For non-QM borrowers being 30 days or more late for the first time, the 0.47% is 7 basis points over April's, dv01 reported.
The cure rate was lower, by 20 basis points, to 23.02%.
A fluid matrix likely leads to more issues
The conforming box doesn't change all that frequently, so it gets a higher level of trust. But the
Plus, those terms can vary from aggregator to aggregator for what are otherwise similar looking products.
"It does drive a lot more attention to really what is the value of those assets, and I think that the more mature non-QM lenders are spending a lot of time really looking at the appraised values and the valuation of those properties, for that reason," added Dave Parker, LoanLogics' CEO.
At the end of the day, the non-agency business is "a true capitalistic market," Riddell said. "The competition, the pricing, the changes, the risk, it is very fluid as to where the money is and where the market goes, whereas the GSE world is very methodical, and it doesn't move with that frequency."
This is why lenders are attracted to the non-agency business and are
"The rules and the data that we collect and validate, we're being asked to increase the amount of content all the time, so that we can accommodate non-agency product nuances," Riddell said.
The credit score debate's effect on non-agency
Even the
"But at this point in time [Classic] FICO is the law of the land, and we're certainly not going to be the first to deviate from it," said Jared Neale, portfolio manager of RMBS for AD Mortgage, in an interview at the Mortgage Bankers Association's Secondary and Capital Markets Conference in May.
Home equity product securitizations are another area of growth in the non-agency side. In the first quarter, of the $47 billion of home equity extracted, $25 billion of it came from a second lien, according to ICE Mortgage Technology.
The home equity side of non-agency
In 2022, Achieve, a personal finance company, did its first "AAA" rated securitization of HELOCs.
This was the first rated HELOC issuance since the Great Financial Crisis, said Kyle Enright, president of lending, in an interview also conducted at MBA Secondary.
"It took a lot of work to get there, and then on the back of that, we've had seven more successful securitizations, all of whom have been AAA rated at the top of the stack," Enright said.
These were rated by KBRA, Morningstar DBRS and Standard & Poor's and he termed their comments regarding the deals as an endorsement of the quality of the product and process produced by Achieve.
When it first approached the rating agencies in the summer of 2022, it gave them a "large back book of historical originations" to conduct a third party review. "Let's just say that was a learning experience, a good healthy one," Enright noted.
As a result of this, Achieve is doing pre-funding quality control on its production.
In May, the company expanded its originations base
"Right now we've built up a lot of good will over the last three plus years in the securitization markets, we've built up a lot of goodwill from the investors who buy our loans for the last five plus years, and we take that really seriously," Enright said. "We don't want to squander that, and so it's part of what will allow us to hopefully successfully launch TPO."
Plans are for Achieve to blend its consumer-direct and TPO production in its future issuances for now.
Older deal redemptions to help non-agency volume
Meanwhile, the
A sizable pipeline of 2023 and 2024 vintage non-QM transactions is scheduled to reach their optional redemption dates this year or next, KBRA said. It could provide "a meaningful source of seasoned, performing, and at- or above-market rate collateral" to the private-label securitization market.
This cohort consists of approximately $68.2 billion by original balance across 174 transactions, with roughly 29% from 2023 and 68% from 2024 vintage transactions.
"This refinancing opportunity stands in stark contrast to the lingering backlog of non-QM transactions whose earliest optional redemption dates occurred between early 2022 and mid-2025, which are either generally comprised of low coupon collateral and/or became eligible when securitization spreads were not conducive to significant issuance," the KBRA report said.
The momentum comes from issuers' success in securitizing called collateral, with seasoned deal issuance reaching new highs in the fourth quarter of last year and the first quarter.
KBRA estimates at least 12 standalone transactions totaling approximately $5.2 billion issued in 2025 and 2026 through April which have included loans from called securitizations.
Yet, many 2021 and 2022 transactions remain outstanding despite having already passed their optional redemption dates. These deals have lower weighted average coupons, averaging approximately 5%, which reduces the issuers' incentives for redemption in the current higher-rate environment.
However, KBRA noted some possible clouds. "Call momentum could slow if execution conditions become less favorable," the report said.
"For example, higher rate volatility could widen securitization liability spreads, reducing the economics of calling lower-WACs seasoned collateral."
Slower origination activity of non-agency mortgages is a mixed bag for securitizations.
It could increase demand for seasoned collateral to be put into new issuances. On the other hand, a thinner pipeline could reduce securitization efficiency along with investor engagement and not create the scale needed to execute calls at attractive levels.
"As a result, conditions that are currently supportive of optional redemptions may become less favorable if market, housing or liquidity conditions weaken," KBRA concluded.
