The non-qualified mortgage (non-QM) market has experienced significant growth in recent years, driven by factors such as rising home prices and a shortage of affordable housing. However, there are concerns that the recent surge in non-QM securitizations may be accompanied by elevated levels of stress.
Signs of Stress
Several signs point to elevated stress in recent non-QM securitizations:
High Delinquency Rates:
Delinquency rates for non-QM loans have been rising in recent quarters. According to Bloomberg, the 90+ day delinquency rate for non-QM loans securitized in 2022 was 5.2%, significantly higher than the 3.2% rate for QM loans.
Increased Loss Severity:
Loss severity, or the percentage of defaulted loans that result in a loss, has also been increasing for non-QM loans. This is due to factors such as higher loan-to-value (LTV) ratios and weaker credit profiles among non-QM borrowers.
Widening Credit Spreads:
Credit spreads, or the difference between the yields on non-QM securities and comparable Treasury securities, have widened in recent months. This indicates that investors are demanding a higher premium for non-QM risk.
Underlying Factors
The elevated stress in recent non-QM securitizations is likely due to several underlying factors:
Lax Lending Standards:
Non-QM loans are often made with less stringent underwriting standards than QM loans. This can lead to a higher risk of default, especially in a downturn.
Overconcentration in Risky Markets:
Non-QM loans are often concentrated in risky markets, such as those with high home price appreciation or a high percentage of speculative investors. This can amplify the impact of a market downturn.
Increased Leverage:
Non-QM borrowers often have higher leverage than QM borrowers. The impact of this cannot be underestimated and makes them more vulnerable to rising interest rates and economic downturns.
Implications
The elevated stress in recent non-QM securitizations has implications for both investors and policymakers:
Investors:
Investors in non-QM securities should be aware of the elevated risk factors and adjust their investment strategies accordingly.
Policymakers:
Policymakers should consider measures to address the risks in the non-QM market, such as stricter lending standards or increased oversight of securitizations.
Conclusion
While the non-QM market has experienced significant growth in recent years, there are concerns that the recent surge in securitizations may be accompanied by elevated stress. Signs of this stress include high delinquency rates, increased loss severity, and widening credit spreads. The elevated stress is likely due to lax lending standards, overconcentration in risky markets, and increased leverage. Investors and policymakers should be aware of these risks and take appropriate action.
Kind regards J. Ross.
