This suggests that the spread component relating to the non-QM designation could be tightening and offsetting the widening due to credit deterioration (see " Factors Affecting Non-QM Mortgage Interest Rate Spreads," Feb. While this spread has been reasonably consistent over time, credit metrics of loans in the non-QM securitized portfolio have weakened. The non-QM spread above the conforming rate is attributable to various factors, including the aggregate credit quality of the non-QM portfolio as well as the non-QM designation itself (which can affect liquidity, among other things). The inertia differential between non-QM and agency loan rates means that it could be several months before the spread reflects the current rate environment. Chart 1 also shows that the spread of the non-QM rate to the conforming rate has typically been 150 bps-200 bps. This leads to a lag in reporting for the average non-QM rate (see Chart 1), unlike the case of current agency mortgage rate readings, which are readily available. There is a period of several months between non-QM loan origination and securitization. but have recently showed a trend similar to CRT and Prime 2.0 speeds, which continue their downward trajectory. It also shows how roughly a year ago, speeds of non-QM RMBS prepayments diverged from those of CRT and Prime 2.0. There's been a rapid uptick in the conforming 30-year fixed rate and a slow decline in prepayment rates for credit risk transfer (CRT) and jumbo RMBS since refinance burnout (the phenomenon in which repeated incentives to prepay have a diminishing impact on the same pool over time) started setting in (see Chart 1). In other words, the prevailing mortgage rate is higher (or at least not low enough to offset frictional costs) than the rate on typical non-QM loans. However, the recent and rapid bump in rates has rendered a large portion of non-QM borrowers out of the money from a refinancing perspective. For this article, we analyzed most of S&P Global Ratings' outstanding rated non-QM transactions to understand the potential impact of the RMBS extension risk that looms.Įarlier this year, our view was that non-QM prepayment rates should increase as the focus of origination strategies shifted away from agency refinancing and toward the production of non-QM loans. The 30-year fixed rate for conforming mortgages has already risen over 200 bps since the fall, and this has a direct impact on the non-QM and other non-agency fixed mortgage rates. Interest rates are broadly expected to increase over the next several years as the Federal Reserve implements its monetary policy tools to combat inflation (see " Economic Outlook U.S. While non-QM borrowers have a stronger interest rate incentive, it might not be sufficient to sustain the relatively high prepayment rates given the additional loan qualification hurdle that needs to be overcome in the non-QM sector. This unprecedented spike in mortgage rates has caused conforming and jumbo prepayment rates to migrate closer to levels at which only home sales drive prepayments (the baseline mobility/turnover rate). However, the recent spike in mortgage rates removed the interest rate refinance incentive for a large portion of the non-QM portfolio. Extension risk is perhaps inevitable for most of the non-QM portfolio, though exercised optional redemptions would be a mitigant.Įarlier this year, we had expected non-QM prepayment rates to increase as conforming rates ticked up slightly and originators focused more on non-QM loan channels.Weighted average coupon deterioration has been muted on outstanding securitizations (loans with higher mortgage interest rates typically have credit/qualification refinancing impairments), which helps preserve spread however, the recent increase in interest rates has squeezed the excess spread in more recent transactions.Faster prepayment rates persist in the full income documentation non-QM RMBS subspace, while the slowest rates are among debt-service coverage ratio (DSCR) loans.Approximately 30% of S&P Global Ratings' securitized non-QM portfolio has no interest rate incentive to prepay, with the average non-QM mortgage rate only 100 basis points (bps) over the average conforming rate.
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