Despite the headwinds caused by the pandemic, the non-QM sector did not suffer heavy losses even when delinquencies spiked in 2020, according to credit rating agency DBRS.
The share of delinquent loans in non-QM mortgage-backed securities, which peaked in June 2020, has been steadily improving. Non-QM MBS credit performance weakened during the onset of COVID-19, but DBRS reported that more than half of seriously delinquent loans became current (42%) or paid off (10.4%) in early 2021. As of January 25, only 34.7% of non-QM MBS loans were delinquent.
“RMBS credit performance backed by non-QM loans rated by DBRS Morningstar had weakened due to a jump in shares that became delinquent since March 2020,” DBRS said in a statement. “Non-QM issuance went on a roller coaster ride in the first half of 2020 as volumes dropped in March, bounced back in May, and rose in June.”
Youriy Koudinov, a senior vice president at DBRS, noted that credit enhancement – the share of available loan balance – helped offset losses. On average, the cushion for senior tranche of a non-QM MBS is approximately 30% at issuance. However, enhancement levels have climbed post-issuance thanks to prepayments – improving non-QM lending and securitization.
DBRS also predicted that borrower income, which shrunk or temporarily ceased amid the pandemic, will likely continue to recover as significant borrower equity bolsters the incentive for homeownership and helps cover losses.