Mortgage

Non-QM RMBS credit score efficiency improves after depreciation peak: dv01

According to the data analysis and management platform dv01, conditions in the credit area outside of qualified mortgage parameters appear to be improving.

The extent of depreciation of previous non-QM loans has finally returned to pre-pandemic levels – below 1% after rising over 16%, reported dv01.

"We are seeing that after the huge spikes in April and May, impairment losses have decreased," said Vadim Verkhoglyad, principal analyst at dv01. "The new borrowers who are criminal or depreciated have about the same interest rate as they did before COVID."

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

Although the overall reduction rate fell from a high of over 23% at the end of May, it is still just over 19%.

"We've largely normalized for new borrowers, but we still have the large overhang of borrowers who have been compromised," said Verkhoglyad.

Impairment rates for non-QM loans peaked higher than the unemployment rate this year as a large percentage of borrowers receiving these loans are self-employed and face additional difficulties due to their more complex and variable incomes. According to dv01, an estimated 45% to 50% of non-QM borrowers are self-employed.

The recent improvement in the rate at which current loans are impaired suggests that the outlook for self-employed borrowers is improving. This should help encourage the cautious return of lenders like Impac Mortgage Holdings to the non-QM market.

However, there has not been a full return to prepandemic levels when it emerged, Verkhoglyad said.

"The sector grew significantly prior to COVID and that has largely ceased. Much of the securitization activity that we have seen since April has consisted mostly of originations that were completed prior to COVID or that were guaranteed to fund prior to the pandemic," he said. "The volumes just don't have the same capacity as them. I think we still face a challenge there."

The issuance and pricing of private label residential real estate mortgage-backed securities has also resumed as it has not been fully reclaimed.

"Securitisations have returned. We have seen a few, and prices for the oldest tranches have declined somewhat, but they haven't quite returned to pre-COVID levels," Verkhoglyad said. "For anything below the seniors, the pricing is still a bit higher and in some cases tranches are kept."

The non-QM universe of securitized loans has a current face value of more than 7 billion US dollars, according to dv01, which has been tracking the data since 2018.

While the non-QM market may recover from pandemic upheaval, it nonetheless faces other uncertainties about the government's definition of qualifying mortgages.

The Consumer Financial Protection Bureau has proposed changing its parameters for the QM Safe Harbor, suggesting that it is determined primarily by a price threshold rather than a debt-income limit.

Even if the state-sponsored companies have a temporary exception to the non-QM rule and currently subscribe a limited number of self-employed borrowers according to strict guidelines, this exception could end. It was originally supposed to expire in 2021, but the CFPB last announced that it would extend it until the QM definition was updated.

In addition, the bureau has released another proposal that will provide a safe haven from legal liability for certain non-QM loans that have been on portfolio lenders' balance sheets for at least three years.

Whether these proposals move forward may depend in part on the outcome of the federal elections in the autumn.

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