Recent non-QM securitizations show signs of higher stress

Recent vintages of non-QM securitizations are leading delinquency rates higher, with the segment posting the largest increase in distress over the past 12 months, according to Fitch Ratings.

Thirty-day delinquencies among non-QM/non-prime residential mortgage-backed securities rose 174 basis points over the past 12 months to 5.2%, Fitch said in a report issued this week. RMBS pooled in 2023 saw the rate surge even faster at 240 basis points to 4.9%. 

"The 2023 vintage is the largest contributor to the elevated delinquencies observed," Fitch said.

Performance of more recently issued RMBS showed delinquencies up across all types of securitizations. By comparison, though, prime jumbo 30-day delinquencies were up by 3 basis points to 0.8%.

Similarly, among RMBS delinquent by 90 days or more, the non-QM/non-prime segment hit 2% in March, jumping 86 basis points in the last 10 months. The surge led to a higher expected default rate in Fitch's rating stresses, leading to a negative outlook for four of the agency's non-QM classes.  

Fitch's latest report points to a continuation of trends observed earlier this year, with the agency alluding to "weaker collateral attributes" behind the increased level of loan stress. 

"The increase in delinquencies, however, hasn't significantly affected expected losses. Losses either slightly declined or remained stable due to support from home price appreciation," Fitch said.

Fitch's findings echo a recent report from Morningstar DBRS, which similarly saw higher delinquencies but limited losses. More recent vintages likely include loans made during one of the most challenging periods for lenders, increasing the likelihood for non-QM loans to be backed by weaker credit profiles compared to just a few years earlier, Fitch previously said.  

Fitch sees some further stress ahead in 2024 as "the effects of elevated interest rates pass through the economy and household real income growth slows," its report said.  

"Fitch observes performance declines across all newly originated sectors that are exposed to borrowers affected by affordability stresses and increased debt-service burden."

More seasoned transactions carry with them a more promising outlook thanks to loan-to-value ratios that have fallen across sectors with rising home prices, improving expected losses, the ratings agency said.

The latest report comes as housing researchers note overall delinquencies and foreclosures sit near all-time lows. In February, 2.8% of all U.S. mortgages were either delinquent or in the foreclosure process, near the rate of a year earlier. Seriously distressed loans decreased to 0.9% of all mortgages compared to 1.2% in February 2023.