Total impairments on securitized non-qualified mortgage payments in July rose for two months in a row for the first time since 2020, according to the latest monthly report from dv01.
A mix of new distress and declining cures drove the latest 28 basis-point uptick in the downwardly revised non-QM impairment rate to 4.1%. In June, the total impairment rate for loans that lie outside traditional ability-to-repay parameters had risen 14 basis points from May.
As in other parts of the mortgage market, the rise in total impairment rate — which reflects missed or modified payments — remains far below the pandemic high, but the increase is notable because the non-QM sector has a particular sensitivity to credit risk.
“If housing does turn, it may present itself more aggressively in non-QM than in other spaces,” said Vadim Verkhoglyad, vice president and head of research publication at dv01. “At least since COVID, non-QM has been more of a bellwether and more underperforming. It’s the only asset class that we track where impairment rates never really went down to pre COVID levels.”
While the second increase in two months establishes more of a trend than a single occurrence, impairments remain less pressing to mortgage-backed securities investors than things like extension and prepayment risk.
“If this were to continue for three months or four months, then we would say, ‘Hey, we really have to watch impairments,” Verkhoglyad said.
The fact that most borrowers are in strong equity positions has helped ensure loan performance. July’s data did bear out industry expectations that consumers with loan-to-value ratios above 80% have been under more strain and thus had relatively higher impairment rates.
The non-QM numbers reflect the performance of around 54,000 active mortgages with a total balance of more than $18 billion, and issuance dates no earlier than 2018. The loans have the following weighted-average values: score, 730; LTV, 66.7%; coupon, 5.6%; and debt-to-income ratio, 32.2%. The average balance for individual loans is roughly $390,000.