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The Growing Popularity of Non-Qualified Mortgage Securitizations

tariffAccording to Standard & Poors Global [1] (S&P), the non-qualified mortgage (QM) product has gained significant popularity in the four years since it was introduced, particularly in the past year, with securitization picking up substantially. The non-QM market is the fastest-growing segment of non-agency residential mortgage-backed securities [2] in the U.S., despite still being a relatively small slice of the pie. The non-QM market is on track to double, or even triple, last year's securitization issuance within this year.

S&P found that there have been 20 odd transactions year-to-date, totaling over $6 billion in issuance, which is already almost double 2017's full-year volume. S&P also notes that, when compared to other RMBS categories, non-QMs have prepaid quicker, often soon after loan origination. The report found a conditional prepayment rate (CPR) 35 percent.

“This is much faster than non-agency prime jumbo prepayment speeds, which have been in the range of 5 percent–15 percent CPR,” said S&P in a release.

“What is most interesting about the non-QM behavior is that, unlike prime borrowers, options for non-QM borrowers are more limited,” the release continued. “So what is causing non-QM borrowers to prepay at such high speeds so soon after their mortgages close?”

The S&P investigation focused primarily on loans in deals S&P rated that prepaid within one year of origination—those 10 non-QM deals closed on or before January 2018. According to the report, the dominant driver of prepayments is income documentation. Borrower occupancy (specifically, whether or not a loan was for an investor property) and the duration of income verification also play important roles. The loan interest rate and the borrower FICO score had less impact on prepayments; however, they contributed to the overall fit of the model.

The full report, "Is It Life in the Fast Lane, or Will They Start to Take It  [3]Easy?" [3] was published on Sept. 21, 2018, on RatingsDirect [4].