By the Numbers
Non-QM investors should reach for DSCR loans as prepay speeds rise
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. This material does not constitute research.
The recent spike in rate volatility should spur both non-QM aggregators and investors to reach for loans that offer better convexity. Investor loans in non-QM trusts broadly offer greater prepayment protection than owner-occupied loans. Within investor collateral, DSCR loans, particularly those with higher LTVs, appear to offer the most protection against rate volatility and faster speeds across a broader cohort of non-QM collateral. Investor sentiment appears to be shifting towards more positively convex, better enhanced deals backed by investor loans, which should translate to tighter spreads on these profiles.
Speeds across the universe of loans securitized in non-QM trusts have been steadily increasing since the beginning of last year. Cohort level speeds bottomed out at roughly 6 CPR last January and have steadily risen, registering 15 CPR in April despite stubbornly elevated mortgage rates. The rise in speeds may be due to a confluence of factors. Home price appreciation and trapped equity in more seasoned loans likely created incentives for certain investors to release that equity through cash-out refinancings while the tightening of risk premia in certain cohorts likely provided a catalyst for some rate refinancing opportunities (Exhibit 1).
Exhibit 1: Non-QM speeds have more than doubled since the start of last year
Source: Santander US Capital Markets, CoreLogic LP
The recent rise in prepayment speeds across the universe of securitized collateral appears to be driven in large part by the decoupling of speeds across owner-occupied and investor loans as owner-occupied loans have prepaid faster. Speeds on second home loans have spiked recently as well, but they tend to be quite volatile given they are a small cohort and subject to more idiosyncratic prepayments (Exhibit 2).
Exhibit 2: Faster speeds driven by owner occupied and second home loans
Source: Santander US Capital Markets, CoreLogic LP
Obviously absolute speeds don’t tell the whole story as a cohort level analysis will obfuscate key differences in attributes that may drive faster or slower prepayment rates, the most important of which is the level of refinancing incentive. Capturing refinancing incentive in non-QM loans can be trickier than other, more homogeneous cohorts, such as agency conforming or prime jumbo loans, given a much more expansive matrix of risk-based pricing in non-QM lending. Given this, the below analysis captures each loans’ rate in excess of the primary conforming rate at time of origination in order to normalize and evaluate different non-QM cohorts based on their ‘SATO adjusted’ incentive.
A look at response to refinancing incentive across cohorts of non-QM loans
Based on this methodology, investor loans underwritten to a DSCR ratio greater than one offer the best convexity when measured against other forms of non-QM underwriting. Lower DSCR loans offer comparable prepayment protection when modestly in-the-money but prepay 10 CPR faster than >1 DSCR loans when both cohorts are 125 bp in-the-money. Fully documented non-QM loans, inclusive of both owner-occupied and investor cohorts, are the most negatively convex, likely due to fewer frictions associated with refinancing fully documented loans than those that use alterative underwriting (Exhibit 3). Based on observations of other cohorts of loans, specifically conventional conforming ones, recently originated, fully documented, owner-occupied loans have exhibited the most acute response to refinancing incentive as they are relatively easy to re-underwrite and can be the first loans brokers look to refinance when mortgage rates decline.
Exhibit 3: >1 DSCR loans exhibit the flattest prepayment S-curve
Note: S-curves based on 24-month observation from April 2023-April 2025 on 2019 through 2024 vintage NQM transactions.
Source: Santander US Capital Markets, CoreLogic LP
Within DSCR loans, the secondary credit characteristic that appears to have the largest impact on in-the-money speeds is mark-to-market LTV. Loans with greater amounts of mark-to-market equity exhibit substantially faster speeds when in-the-money than more levered ones. DSCR loans with more than 50 points of equity exhibit elevated prepayment speeds even when out of the money. Elevated speeds on investor loans with low leverage are driven by investors’ incentive to unlock and re-lever that equity irrespective of the elevated cost-of-funds associated with re-levering the trapped equity. The presence of prepayment penalties on out-of-the money investor loans may prove to be less of a deterrent to refinancing as originators may choose to waive penalties when rates are elevated, origination volumes depressed, and gain-on sale margins squeezed. Conversely, more levered DSCR loans exhibit very flat S-curves. DSCR loans with mark-to-market LTVs of 60 or greater prepay in-line with less levered profiles when deeply out-of-the-money and roughly 50% slower than de-levered loans when they have more than 100 bp of refinancing incentive (Exhibit 4).
Exhibit 4: More levered DSCR loans exhibit the flattest S-curve
Note: S-curves based on 24-month observation from April 2023-April 2025 on 2019 through 2024 vintage NQM transactions.
Source: Santander US Capital Markets, CoreLogic LP
Implications for pricing
Until recently, non-QM deals stocked exclusively or mostly with investor loans traded at a concession to deals collateralized by mostly owner-occupied loans. Over the past few weeks that pricing concession has, at a minimum, narrowed and arguably disappeared. In addition to better convexity, deals backed by larger populations of investor loans generally carry more hard credit enhancement than those with bigger populations of owner-occupied ones. Based on historical performance, rating agencies assign a higher foreclosure frequency on investor loans then owner-occupied ones with comparable credit characteristics, which, in turn, will translate to greater amounts of required credit enhancement.
Rising recessionary concerns coupled with higher volatility and uncertainty about the future path of rates appears to have skewed investor preferences towards better enhanced, more positively convex profiles. Spreads on investor loan-backed deals appear poised to trade through owner occupied ones as investors ascribe greater value to both the credit protection and convexity afforded by these profiles. Sponsors may look to skew acquisitions towards greater populations of investor collateral as well. Better convexity will translate to slower speeds and better performance on retained excess spread classes and a lower cost-of-funds at the top of the capital structure if spreads continue to tighten relative to owner occupied deals. And higher levels of required credit enhancement on investor deals may be offset, in large part, by the recent pronounced flattening of the credit curve across investment grade credit tranches of non-QM deals.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
