Non-QM drives RMBS H125 gains amid uncertain outlook

For the rest of 2025, it's an open question if the non-agency mortgage-backed securities market maintains its strong performance from the first six months, given the backdrop of tariffs, economic uncertainty and housing affordability, said Morningstar DBRS.

Issuances in the first six months of 2025 topped volume for the same period in 2024 and credit performance was "in check," the report said.

"Heading into the second half of the year, possibly disruptive political influences still loom and the economic landscape looks to be a little less robust, but the near-term environment for mortgage, housing, and RMBS will likely still include continued modest home sales, some home price appreciation, and mortgage rates remaining in the 6%–7% range, absent any significant economic shifts," it continued.

Conforming volume, loans which could be sold to the government-sponsored enterprises, is likely not to be much improved over 2024.

However, "non-qualified mortgages and expanded products like the 'new-age' home equity variations should continue to see gains in outstandings, leading to commensurately more RMBS issuance," the report said. "Meanwhile, delinquency levels will likely stay contained within normal projected ranges, and credit losses are anticipated to remain minimal, though the first post-pandemic recession has yet to be seen."

Besides affordability, the political backdrop, inflation and recession, changing environmental conditions and the related climate risk present more headwinds for RMBS.

Credit performance of Morningstar DBRS deals "remained on trend." This includes delinquencies and realized losses remaining well within projected ranges, while incrementally faster prepayment speeds meant deals will deleverage quicker than expected.

So far this year, the rating agency has done "a number of upgrades but zero downgrades."

For the first half of 2025, Morningstar DBRS has rated 89 new deals, versus 167 for all of 2024 and 96 in the year before that.

In a separate report issued on July 11, B of A Global Research said year-to-date non-agency RMBS issuance was $80 billion, including $1.3 billion in the prior week.

"Most of the issuance has been contributed by non-QM, jumbo 2.0 and second liens," the B of A Global Research report said.

In the first half, prime RMBS volume was modestly ahead of the same period in 2024, "as prevailing jumbo mortgage rates have been largely range bound in 2025 and incrementally lower than the levels seen in the first part of 2024," said Corina Gonzalez, associate managing director, who authored this part of the report. "As such, we expect prime RMBS issuance to stay modestly ahead of 2024 levels, despite the 2025 base-conforming jumbo loan limit being 5.2% higher for 2025."

The outlook for non-QM RMBSWhen it comes to non-QM, over $30 billion in pricings have taken place this year, close to the nearly $40 billion, a record amount according to Finsight, which were done for all of 2024, said Mark Branton, senior vice president in this part of the report.

"Non-QM execution yields on the back of a Treasury curve that has drifted incrementally lower have helped issuer execution costs stay generally favorable," Branton said. "For the rest of 2025, the market may well see more of the same as affordability under conventional guidelines remains a headwind for certain borrowers in the presence of a tight but steady housing market, which may help provide some more sector upside growth."

As consumers cure their credit profile, it gives these borrowers refinance possibilities, "which help prepayments come in above conventional/prime mortgage speeds in a steady rate backdrop," Branton continued.

GSE credit risk transfers, which are classified with the private-label issuances, was about $4.5 billion, down a bit from first half tallies for the past two years of over $5 billion," said SVP Yash Shah. Full year CRT issuance in both 2023 and 2024 were slightly over $8 billion.

"With only slight growth in GSE acquisitions over H1 2025, H2 GSE CRT volume may remain on its current pace, in keeping with 2023 and 2024," Shah said. "Sector credit performance should remain well contained for both low-loan-to-value and high-LTV reference pools; H1 DQs leveled off across vintages and realized losses were still minimal."

How home equity investment insurances faredHome equity investment issuances are a newer market participant; only Morningstar DBRS and Kroll Bond Rating Agency have methodologies in place to rate these deals.

In the first half of this year, eight public/private HEI deals worth about $2 billion have come to market, said Morningstar DBRS senior vice president Derek Moran.

"The second half of the year looks to be on a similar pace, with a number of transactions already in the pipeline," Moran said. "In comparison, 2024 saw a full-year $2.3 billion issued across a dozen rated HEI transactions."

HEI warehouse facility rated deals also grew in the first half of the year, to two, plus four more in the pipeline. This is compared with a single transaction, the first-ever rated HEI warehouse facility, a year ago.

The first half of 2025 also saw HEI warehouse facilities grow further, with two rated in H1 and four more already in the works, following a single deal in 2024, the first-ever rated HEI warehouse facility.