Non-QM delinquencies rise, but losses remain subdued

The delinquency rates for securitized non-qualified mortgages are on the rise as these loans continue to season but they remain within an acceptable range, according to Morningstar DBRS.

Meanwhile, new issuances had their best quarter since the second quarter of 2022 as primary-to-secondary market spreads tightened even though mortgage rates increased.

As of March 25, the delinquency rate for non-QM MBS was 5.09%, up from 4.88% one month ago, 4.81% at the end of last year and 3.75% for the first quarter of 2023.

"Non-QM RMBS structures across the sector held relatively secure as virtually all outstanding transactions continued to pass their deal performance tests," said the report, whose lead author was Mark Fontanilla, senior vice president. "Meanwhile, collateral losses at the deal level remained modest, which helped improve credit enhancements, albeit at a slower pace than when speeds were much higher in 2022."

This compares with a total RMBS delinquency rate of 1.52%, a slight drop from the prior month's 1.55% but up from 1.47% from the end of 2023 and 1.42% over the previous 12 months.

Prime credit RMBS had an 89 basis point delinquency rate in March, up by 6 basis points from February, 7 basis points versus December and 4 basis points from March 2023.

Meanwhile, on a month-to-month basis, the late payment rate for government-sponsored enterprise credit risk transfer deals was 4 basis points lower at 1.49% and mortgage insurance-linked notes was 5 basis points lower at 1.24%.

"Accumulated net losses across non-QM pools, which are still subdued as a tight housing market and resilient economic backdrop continue to support mortgage credit performance overall," the report noted.

An unemployment rate of under 3.8% was below historic norms. Inflation, while still hotter than the Federal Reserve likes, held at between 3.8% and 3.9%.

The 30-year fixed rate mortgage remained in the 6.6% to 6.9% range for most of the period, which allowed consumers to get used to that environment, the report said.

Prepayment speeds have gotten slightly faster on non-QM deals, but are still slow relative to past activity.

For the March period, the one-month constant prepayment rate was 8.9%, compared with 7% from the December statements.

"Prepayment speeds in the other major RMBS segments were either slower or only slightly faster versus non-QM in [the first quarter]," the report said. "For comparison, benchmark GSE CRT reference pools and prime credit collateral pools in aggregate still remained in the area of 3% to 4% CPR, while non-QM in aggregate finished Q1 at nearly 9% CPR."

When it comes to new securitizations, pricing volume of $8.8 billion for the first quarter was up 30% from the previous three months. It was also the most prolific quarter since the $9.6 billion produced in the second quarter of 2022, Morningstar DBRS said, citing Finsight.com data.

"Despite Treasury rates edging up since December, non-QM RMBS spreads were on a general tightening trend, helping keep deal execution costs less volatile and more contained than in Q4 2023," the report said.