Non-QM risk builds in Southeast, self-employed loans: dv01

Credit stress in non-qualified mortgages is concentrating in the Southeast and among loans to self-employed borrowers, according to the August performance update from dv01, a Fitch company.

Impairments in the Florida-Georgia-South Carolina region ran 150 basis points above any other region in August, up from a gap of less than 70 basis points at the start of 2026. Impairments on documentation types used to underwrite self-employed borrowers have risen more than 200 basis points since early 2025, while full-documentation and DSCR loans improved by 50 to 100 basis points.

Overall performance of loans underlying non-qualified mortgage securitizations is no longer improving from their fourth quarter 2025 peaks as they did in the first half of this year.

If anything, impairments are "trending sideways" in the past few months, the August 2026 update from dv01, a Fitch company, said. The report defines impairments as a "combination of delinquencies and modification."

The August performance data does not include changes to the mortgage interest rate environment during September. Conforming rates are currently at 7.3%, according to Freddie Mac.

Rates on the 30-year jumbo, the only non-conforming mortgage listed on the Optimal Blue website went to 7.652% on Sept. 29 from 6.816% on Sept. 1. This product ended September at 7/359%.

This compares with an August where jumbo rates stayed primarily in the range between 6.6% and 6.7%, the Optimal Blue website said.

"While material liquidations or losses have yet to materialize, there is some concern that the non-QM universe isn't able to sustain strong performance despite call activity and improving vintage behavior," the report noted.

Earlier, Fitch Ratings issued a report which showed the 30-day late payment rate for non-QM/non-prime was 5.02% in August, an improvement of 27 basis points from the prior year, while the 90-day rate of 2.33% was 10 basis points lower.

In the latest dv01 report, 30-day plus total impairments rose 14 basis points in August from July, the first gain in three months.

"That said, much of the decline over the past three months was a reversal of May's Sunday month-end effect rather than organic credit performance strength," dv01 said. "While it is still an improvement from 2025 where Sunday month-ends never resolved, recent strength should be interpreted with caution."

Historically, when months end on a Sunday, delinquency rates rise because servicers are not able to process any payments consumers make on the last two days of the month.

But when it comes to annual trends, dv01 was more cautious, saying things are not as encouraging because August made three months in a row with higher year-over-year total impairment growth after seven months of zero increases.

"New impairments continue to be a sore spot for the sector," the report said. Overall new impairments, along with first time 30 day or longer new impairments "are volatile" month to month.

"More holistically, however, both metrics are still well above pre-COVID and 2022 levels, though they are slightly lower than 2025 levels," dv01 said.

Total delinquency rates were 12 basis points lower, which dv01 said was responsible for the entire fall off in impairments.

But cure rates continued to deteriorate, down 260 basis points in August; made payment rates were off by 200 basis points.

Excluding seasonality and day count issues, both metrics have declined in six of the past nine months, the report said.

These are now over 200 basis points lower year-over-year on average and have been negative in 10 of the past 12 months. 

A report tracking long-term delinquency outcomes shows the non-QM sector deteriorating faster than any other sector which dv01 tracks.

Furthermore, dv01 said recent impairments have been disproportionally concentrated in the Florida-Georgia-South Carolina region.

"In August, impairments were 150 basis points higher than any other region, versus a gap of less than 70 basis points at the start of 2026 and zero at the start of 2025," the report said. "It is the only region where impairments are higher than year-end 2025 levels."

Credit score also played a role in the higher level of impairments, with August's increases concentrated among loans with FICO scores under 660; the 700-to-740 range also had a modest increase.

But loan-to-value ratio was a not a major differentiator when it came to mortgage performance.

"Holistically, the impairment relationship across FICO and LTV ranges has remained consistent over the past 18 months, suggesting either underwriting has been properly calibrated or both measures have not been responsible for changing behavior in the same way as region and documentation type," dv01 said.

Speaking of documentation issues, impairments among the types used to underwrite self-employed borrowers have increased over 200 basis points since the start of 2025.

But full documentation and debt service coverage ratio loans have seen impairments fall by between 50 basis points and 100 basis points. Verification of employment loans were "essentially unchanged" over the same time frame.