The wide-ranging nonagency mortgage market is giving traditional lenders more reasons to consider branching out into it, according to servicers supporting these strategies.
"Certain types of nonowner-occupied GSE loans that are agency deliverable now trade better in the nonagency space," said Michael Yanniello, chief operating officer, head of portfolio oversight and operations, Onity Group, told attendees at the Mortgage Bankers Association event.
Large banks, insurers and the private securitized market have all had a growing appetite for those products and others such as
"We've seen our nonagency book of opportunity probably triple as far as new origination in the last few years," he said, noting that the total includes the company's own loan production, and subservicing clients originating into its platform or buying bulk assets and transferring them to it.
An increasingly competitive securitized market grew 78% in 2025, according to Whole Loan Capital's numbers.
Subservicers on the panel indicated that they could support traditional lenders looking to expand into opportunities in nonagency options, providing assistance with some payments requiring specialization, such as home equity line of credit draws, and custom data.
"We have clients who have very specialized reports that they want, or a customized report that they want, and we can build all of that," said Allen Price, senior vice president and head of sales at
Some traditional lenders at the conference appeared hesitant about entering or getting more involved in the nonagency market, but others showed interest.
What follows are some of the considerations for traditional lenders eyeing the private market today, including data, performance, and cyclical considerations.
The nuances of non QM data
Datasets have been a challenge for some nonagency loans because they require some fields standard systems don't have and these can be important for getting a handle on delinquencies that
Securitized nonqualified mortgage delinquencies have been drifting upward and recently been above 5%, Quincy Tang, managing director at DBRS Morningstar, said during an outlook press conference last month.
That suggests that while non-QM performance may not be as strong as the government-sponsored enterprise's market, its average is lower than Federal Housing Administration's.
Actual losses from non QM securitizations that protect investments with credit enhancement have been far lower, with one Kroll Bond Rating Agency study last year finding historical losses for the so-called 2.0 deals since the Great Financial Crisis have been below 5 basis points.
That's led some to question why CE levels haven't been lower across the investment-grade credit spectrum of tranches in securitizations, which run from the top-rated AAA to BBB.
"On credit enhancements, the lowest amount any deal has ever received was 20% to AAA. The 2025 average was approximately 26%. So if there's 26 points to AAA, 20 to AA, 11 to A, and 7 to BBB, and your losses are even 20 bps (4x the Kroll number) and you have to hold a minimum amount of capital that's at least 5%, why do you care about a slightly growing delinquency rate?" said David Akre, principal at Whole Loan Capital, in an email.
"I think if credit enhancements were based on reality and not the 'never again' rating agency mindsets (meaning they would be significantly smaller), issuers would take a much closer look at delinquency trends because they could possibly affect the issuer's equity returns," he added.
KBRA analysts indicated that they have occasionally made adjustments in response to 2.0 performance since the crisis but have been cautious about it because post-GFC loans in deals haven't been through a real downturn yet, given how stimulus blunted the pandemic's impact.
"It's a fair question to ask. I think the thing that folks should remember is that it's still been a very, very, very benign period of performance in the mortgage space, particularly. Even our single-B rating stress is a 10% peak-to-trough decline in national home prices. We've had nothing close to that," said Jack Kahan, global head of asset and mortgage-backed securities at KBRA.
"We do still think the underwriting is strong, but the environment just really has not been stressful. The credit enhancement is to account for when there are stressful time periods that occur," he added.
Prime performance after the QM definition's change
KBRA is just starting to publicly release data on performance in different areas of the 2.0 market as it has developed more of a track record, Kahan said, noting that last year's non QM study and one reflecting on prime performance late last week are among the first.
"A key takeaway is how low the defaults are, historically, just below 1%, and even in the height of stress from covid, still below 2%," said Armine Karajyan, a senior director at KBRA, commenting on the prime sector's report.
Karajyan said another key finding from that report that's notable is that it suggests that
"While there may have been some shift in credit attributes like higher DTI over time, over certain vintages, or higher risk layering, that hasn't actually resulted in higher vintage performance, like defaults," she said.
An industry veteran's advice
Traditional lenders should keep a hand in the nonagency market to address potential cyclical shifts, according to
"I think what happens with mortgage companies is they're so agency and purchase focused that everything goes into that. Then what happens is the market shifts, they're not ready," he said. "You have to build product development and cap markets. You have to build the ability to handle nonagency, you have to do non QM, you have to do HELOCs, because you've got to be able to take advantage of non owner occupied and cash out the same as you do in purchase."
However, Dallas acknowledges that is easier said than done, because costs from both in terms of expenditures and customer value have to be weighed carefully before deciding whether or how to sign a contract with a subservicer to support any particular product, such as a HELOC.
FHA may have higher arrears, but also higher margins. HELOCs have lower margins and higher operational costs although they do have value in customer retention.
The transfer of the asset and the handling of nontraditional data is part of a challenge that some subservicers may be able to help with but a traditional mortgage banker also has to consider other costs to originate, possibly through third-parties, and warehouse financing expenses.
"Haircuts are high," Dallas said. "You don't have the ubiquity of investors like you have for Fannie or Freddie, where everybody can buy it."
That means traditional lenders have to weigh all of those considerations in looking at the costs of a subservicing contract, he said.
