MBS: Growth, ARMs and shifting spreads in non-QM loans
admin | February 21, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The non-QM loan market has grown exponentially in the last four years as non-QM issuance has risen and the potential for GSE reform, such as the end of the QM patch, has drawn loans into the market. ARMs form as much as 65% of non-QM lending in contrast with only 10% to 15% of agency loans. ARMs allow non-QM lenders to limit interest rate risk. And borrowers expecting to get an agency loan or another non-QM loan in the near future often get better terms with an ARM loan. Varying credit qualities explain the wide divergence in non-QM interest rates. Every 100-point increase in FICO leads to about 90 bp tightening in the non-QM loan spread, according to S&P. Non-QM spreads have changed with market conditions. The average non-QM spread tightened from early 2017 to late 2018 then widened into late 2019, reflecting the changing market perception of credit and liquidity risk. Non-QM spreads will likely compress as more lenders come into the market to originate non-QM loans. The S&P article is here. Source: S&P, APS.
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