Non-QM RMBS loan performance improving after impairment spike: dv01

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Conditions in the lending space outside of qualified mortgage parameters seem to be improving, according to data analytics and management platform dv01.

The amount of impairment on previously current non-QM loans has finally returned to pre-pandemic levels — below 1% after spiking above 16%, dv01 reported.

"We are seeing that, after the huge spikes in April and May, impairments have come down," said Vadim Verkhoglyad, a principal analyst at dv01. "The new borrowers going delinquent or impaired are roughly the same rate as they were before COVID."

The monthly numbers tracked by the data and analytics provider through Aug. 31 show loans representative of the full universe of securitized non-QM products are improving, including those of previously impaired loans.

However, the overall impairment rate — while down from a peak above 23% at the end of May — remains elevated at just above 19%.

"For new borrowers, we've largely returned to normal, but we still have the large overhang of borrowers that were impaired," said Verkhoglyad.

Impairment rates for non-QM loans peaked higher than the unemployment rate this year because a large percentage of the borrowers who get these loans are self-employed and face additional hardships related to their more complex and variable incomes. An estimated 45%-50% of non-QM borrowers are self-employed, according to dv01.

The recent improvement in the rate at which current loans become impaired suggests prospects for self-employed borrowers are improving. That is expected to help encourage what has been a cautious return to the non-QM market by lenders such as Impac Mortgage Holdings.

However, there has not yet been a full return to pre-pandemic levels in origination, said Verkhoglyad.

"The sector was growing substantially before COVID and that's largely stopped. Much of the securitization activity that we've seen since April has been mostly comprised of originations that were completed before COVID or were guaranteed to fund before the pandemic," he said. "The volumes just aren't there at the same capacity as they were. I think that's where we're still facing a bit of a challenge."

Issuance and pricing of private-label residential mortgage-backed securities also has resumed by not fully recovered.

"The securitizations have come back. We have seen quite a few and the pricing has come reasonably back on the senior-most tranches, but it has not come all the way back to pre-COVID levels," Verkhoglyad said. "For everything below the seniors, pricing is still quite a bit wider and in some cases tranches are being retained."

The non-QM universe of securitized loans has a current notional balance of more than $7 billion, according to dv01, which has tracked the data since 2018.

While the non-QM market may be recovering from pandemic-related upheaval, it still faces other uncertainties related to how the government defines qualified mortgages.

The Consumer Financial Protection Bureau has proposed changing its parameters for the QM safe harbor, suggesting it be determined primarily by a pricing threshold rather than a debt-to-income limit.

Also, while the government-sponsored enterprises have a temporary exemption from the non-QM rule and currently underwrite a limited number of self-employed borrowers using strict guidelines, that exemption could end. It was originally scheduled to expire in 2021, but the CFPB most recently has said it will extend it until the QM definition is updated.

In addition, the bureau has issued another proposal that would give a safe harbor from legal liability to certain non-QM loans that had been on portfolio lenders' balance sheets for at least three years.

Whether these proposals move forward may hinge in part on the outcome of federal elections this fall.

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