Non QM performance wavered in 3Q

Non-qualified mortgages in the securitized market exhibited some mixed performance over the summer, according to a DBRS Morningstar report published Thursday.

The delinquency rate in the third quarter overall was slightly higher than in the second at 3.8% compared to 3.5% in the second.

But whether distress continues to grow in this part of the market remains to be seen.

The latest monthly number for the net impairment rate reported by dv01 this week suggests distress declined in August, falling to 3.9% from 4.1% in July. (Fitch Ratings has agreed to buy a majority stake in dv01.)

The relative stability in non-QM loan performance over the summer suggests that interest rates continue to be a bigger concern than credit for the time being.

“When you have a rate move that’s violent, like the one that we’ve had this year, you’re going to see a situation where the securitizations that are coming to market are still reflecting a lot of loans that have been originated in a very different rate environment,” said Vadim Verkhoglyad, vice president and head of research publication at dv01. 

A backlog of seasoned non-QM loans has grown as a result of this, Kroll Bond Rating Agency noted in a report published Thursday.

“The current rising rate environment dis-incentivizes issuer redemption by reducing the value of existing loans and increasing the required coupon on newly securitized classes,” KBRA said in the report, noting that that’s created a “glut” which will eventually re-enter the market.