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The Federal Deposit Insurance Corp is said to have just issued a confidential request for proposal, seeking a vendor to perform marketing and sales advisory services, likely for assets of failed banks. Once an award is made, the name of the vendor will be disclosed on the FDIC website.
The fact that the FDIC is looking for additional resources to market assets taken by the receivership suggests that the agency may be anticipating more bank failures. Although loss severity rates on the dominant exposure of banks – namely real estate loans – remain very low, there are signs that credit in areas like multifamily mortgages and non-agency residential loans are weakening.
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In agency and government loans, there is already a striking divergence between low FICO, low loan-to-value loans in mortgage-backed securities and loans to borrowers with superior credit attributes mostly owned by banks. A similar difference in default activity is visible in non-QM, "hard money" loans which cannot be sold into agency and Ginnie Mae MBS, and therefore must be purchased by private investors. Banks have
The telltale indication of future credit problems ahead is the rate of growth in non-QM lending. Non-QM residential issuance is projected to be over $100 billion in 2026, a 46% increase from 2025. Why the sharp increase? Because the crowd of hard money investors and insurers looking for non-QM paper has exploded in the past five years.
The golden rule in non-QM lending is that demand creates supply, a concept associated with the economist John Maynard Keynes. The rise in home prices and the related decline in default rates has created a gold rush in residential assets, led first and foremost by insurers. By some measures, non-QM RMBS issuance is up 81% through the first 5 months of 2026. These institutional investors in private credit want to earn their management fees and bonuses.
One of the reasons that volumes are rising in non-QM RMBS: "Larger loans are increasingly showing up throughout private-label residential mortgage-backed securitizations,"
"In our data, larger loan balances are consistently associated with higher delinquency rates and faster prepayment speeds across shelves and vintages," the Bank of America Securities researchers wrote, while noting that the trend isn't always as straightforward as all that. Nothing involving residential mortgages is ever easy or even efficient.
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Not all researchers agree on the risks. "As non-QM loan originations have increased both in terms of market share and absolute volumes, the instance of several risk factors – and particularly loans that combine negative risk factors (aka "credit layering") – has come down, which has led to improved delinquencies in recent vintages," notes a Morgan Stanley report.
As you might expect, the purveyors of non-QM paper think everything is just fine and report that credit layering is not contributing to growth rates. "Non-qualified mortgage lenders are unconcerned with the uptick in delinquencies on recent vintages," Inside Mortgage Finance reports, "according to executives speaking this week at Information Management Network's non-QM conference in Dana Point, CA."
Our take on the non-QM market is that the combination of strong home prices and brisk investor demand creates a picture of artificial stability, even as
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DSCR volumes have reportedly surged dramatically, showing 91% to 97% year-over-year growth in private lending markets. Once a niche alternative product, DSCR loans now account for roughly 30% of all non-QM securitization issuance. Issuers of this high risk paper often tell investors that demand for DSCR loans is driven by changes in the economy, including self employment, but seasoned industry observers laugh at such explanations.
"Self employment shouldn't drive DSCR unless there is also occupancy fraud," notes an industry executive. "All that said, tightening spreads between non-QM and agency loans are partially to blame here. There isn't the incentive to provide excessive documentation when you can get a loan with 12 months of bank statements."
Despite such concerns, investors are not backing away from DSCR loans. In fact, to the astonishment of veteran hard money investors, DSCR loans have become a booming primary strategy for real estate investors nationwide. Because they don't require personal income verification, DSCR paper is the go-to tool for scaling portfolios and thereby increasing management fees. Again, demand drives supply.
As rental yields compress, fewer properties natively hit the traditional DSCR thresholds of 1.0 or 1.25x debt service coverage vs rental income. Indeed, sponsors are now seeking out "no-ratio" financing options or putting more cash down to force deals to cash flow for end-investors. Creativity is particularly relevant on story loans, where the borrower has changed jobs or has multiple jobs in the "gig economy."
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The fact that DSCR loans are now mainstream assets illustrates the impact of the growing crowd of investors on loan prices, yields and credit. Investors no longer treat DSCR as a "last resort" when bank and traditional hard money lenders say no; they are proactively building portfolios 100% around this loan type from the start.
Why the concern? DSCR is the first subset in non-QM that will lose liquidity. Today the sun is shining in non-QM and the crowd of investors focused on the sector continues to grow. Sell Side dealers are encouraging investors to continue to build portfolios, but a few of the veteran advisors have become more cautious.
"The major Wall Street firms have a good grasp of the market dynamics, but they don't make enough of the supply/demand imbalance," one major analytics firm tells NMN.
"When we do valuations of non-QM whole loans, often the securities backed by non-QM as well as the lower 6-pack, we can see who the loans were originated by, who the seller was and obviously we know who the buyer is and at what level. That information tells all you need to know."
"Insurance companies, insurance companies and then again insurance companies are buying everything they can," he continues. "This is the ecosystem that we saw back in the early 1980s, when the agencies came alive and created their own universe. Today we have a fully developed non-QM universe."
Many insurance portfolio managers often miss the true risk/return profile of non-QM loans, but rarely push back on toppy valuations. Looking at current vintages, the actual duration of non-QM loans is shorter than many investors expect. When you talk to originators of the stuff, they think the durations are even shorter. But when interest rates rise, durations will extend as refinance opportunities disappear.
Financial markets started 2026 expecting one or more cuts in short-term interest rates by the Fed, but instead financial markets have experienced their most significant tightening since the COVID pandemic inflation shock.
Another wave of inflation
