Tailwinds behind the non-qualified mortgage segment are leading to growing secondary market volumes, while loan pools are on par with recent performance levels, according to a new Morningstar DBRS report.
Second-quarter
"Volume in Q2 2025 continued Q1's brisk pace as 2025 continues on track to be bigger than 2024," the report said.
While delinquencies showed mixed results, overall performance raised no alarm bells.
"Structural performance across virtually all deals in the non-QM sector remained on-trend as deal-level losses stayed very low, helping to continue the increase of credit enhancement levels," the report said.
Non-QM prepayments and delinquencies
Prepayment speeds grew during the quarter by approximately 2.5 percentage points from three months earlier to a 13.49% conditional rate. The increase occurred despite the absence of significant mortgage rate movements, which stayed within a narrow 20 basis point range between April and July.
Meanwhile, delinquencies of more than 60 days eased quarter over quarter to 3.6%, down 18 basis points, but up 75 bps from the same time period in 2024.
At the same time, the weighted average of non-QM delinquencies overall fell 51 basis points to 5.69% between first and second quarters, in line with trends seen across all types of residential mortgage-backed securities, Morningstar said.
"Non-QM DQ rates continue to be nominally higher than those of conventional/conforming and prime credit RMBS, as expected given non-QM's intrinsically greater credit risk," it added.
By comparison, average delinquency rates for prime credit pools came in at 0.92% during the quarter. For credit risk transfers offered by the government-sponsored enterprises, the benchmark delinquency rate came in at 1.54%.
The non-QM market is seeing diverging results based on when pools were collaterized, though, with vintages from 2023 and 2024 more likely to exhibit higher rates of delinquency and lower prepayment speeds.
The latest data arrives as lending leaders anticipate
In 2024, non-QM originations accounted for an approximate 5% share of all mortgage originations, according to data from Cotality.
Morningstar attributed recent favorable trends for non-QM issuances to a "modestly mixed, but not deteriorating, macroeconomic environment."
Home price and interest rate trends for the housing market, meanwhile, continued to limit growth in conventional and government-backed mortgage originations, with non-QM increasing proportionally relative to overall lending volumes, it said.
