The origination and securitization of loans that don’t meet Qualified Mortgage requirements has been expanding, and performance is strong. But higher rates are leading to higher prepayments.
A recent expansion has been noted in the origination of loans that don’t meet the Consumer Financial Protection Bureau’s QM criteria, which became effective in January 2014.
A majority of non-QM loans, which
presume a borrower satisfies Ability-to-Repay assessments, are either carried on the lender’s balance sheet or traded as whole loans.
That is according to structured product research from Wells Fargo Securities.
Since last year, investor demand for non-QM loans has been increasing, while the securitization market for primarily non-QM pools has grown slowly but steadily since 2015.
“Year to date in 2017, we have seen $1.6 billion in bonds priced, already well surpassing 2016 volume,” the report stated.
Lone Star Funds has issued around 38 percent of all non-QM securitizations. Other players include Angel Oak, Deephaven Mortgage and Invictus Capital.
The report indicated that non-QM
collateral is closer to legacy Alt-A loans as far as credit score distribution goes. The performance has been “robust so far,” with delinquency and losses subdued. Just one non-QM loan has been liquidated — and that was with no loss.
Interest rates on non-QM mortgages are in the range of 6 percent to 7 percent.
Higher rates have given borrowers a bigger incentive to refinance — pushing non-QM prepayments above their QM counterparts, according to Wells Fargo.
While adjustable-rate mortgages accounted for less than 6 percent of all originations during July according to Ellie Mae Inc.,
non-QM loans had an ARM share of 64 percent.
“While still budding, the non-QM securitization market has seen steady growth over the past year,” Wells Fargo concluded. “AAA ratings and strong investor demand for short-duration assets have brought spreads tighter and should be conducive to new issuance.
“However, with non-QM loans offering high interest rates, lenders may prefer to hold or sell them instead; competition with whole loan execution may cause headwinds to the primary market.”
