![]() ![]() ![]() The increase in non-QM prepayment speeds is likely a result of one or more of the following factors: On a credit-positive note, an uptick in prepayment speeds can be viewed as healthy from a deleveraging perspective (notwithstanding reduced excess interest for non-QM securitizations). For context, excess spread is roughly 2% annualized on average, which would cushion the 0.50% figure. Under the scenario of 10% losses and a 5% forbearance level, assuming all loans end up deferring and were all 18-month plans, this corresponds to a loss rate of 0.50%, which remains inside the average non-QM 'B' credit enhancement level. While three-month deferrals (assuming a fully amortizing 30-year fixed rate mortgage with a 5.5% coupon) result in securitization losses of 1.7% of the loan balance, an 18-month deferral plan would be roughly 10% of the loan balance. We are, however, keeping an eye on the remaining loans in forbearance to assess the resolutions that may arise. The good news is that losses deriving from deferral activity have been relatively small. This includes the resolution of forbearance, in some cases based on deferrals and, in other cases, on a forbearance exit with full reinstatement or a full prepayment. Non-QM loans have exhibited a similar performance trend to that seen in the prime/conforming sector over the past 15 months. Recently, it appears as if the prepayment rates of prime/conforming, CRT, and non-QM are all starting to trend downwards. Meanwhile, prepayment rates for the major subsectors appear to have converged, as non-QM speeds have generally increased between August 2020 and May 2021 (see chart 1). The June remittance data continue to demonstrate a decline in non-QM forbearance/delinquency percentages, whereas prime and CRT have largely flattened. This is to be expected, however, given the weaker non-QM loan borrower attributes relative to those in conforming/jumbo prime securitizations. While subsectors of the residential mortgage-backed securities (RMBS) market, such as credit risk transfer (CRT) and prime jumbo, see 60+ day delinquency/forbearance levels well below 5%, the non-QM sector is still hovering above the 5% mark. This coincides with the rollouts of vaccines and improving economic conditions across the U.S. ![]() Forbearance Levels SubsidingĪcross the residential mortgage landscape, forbearance levels have fallen since last summer's peak. We are also providing our expectations for non-agency RMBS issuance. As the sudden shock to financial markets caused by the COVID-19 pandemic subsides, S&P Global Ratings is providing a snapshot of the non-QM sector in terms of performance and origination based on loans that are, or have been, in our rated pools. Nevertheless, the non-QM sector remains a small fraction of the overall mortgage originations in the U.S., which remain predominantly within the agency space. Since its inception more than seven years ago, the non-qualified mortgage (non-QM) sector has grown in terms of issuance and outstanding, become more widely accepted as a viable asset subclass, and has increased credit availability to borrowers via various loan products. Growing originations are expected to result in a ramp-up of non-QM securitizations (to reach $25 billion by year-end from roughly $12 billion year to date), with originations remaining concentrated in alternative documentation and investor loans.The new QM Rule could create more QM Truth In Lending Act designations.State-specific housing market fundamentals may bode well for recovery values on non-QM loans that remain in forbearance and for those that ultimately go into foreclosure.The overall forbearance/delinquency profile of the non-qualified mortgage (non-QM) sector continues to improve, while currently high prepayment rates appear to be trending back to pre-pandemic levels. ![]()
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