By the Numbers
Loan purpose and geography mitigate non-QM credit risk
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.
Mortgage credit investors are becoming increasingly focused on potential tail risk in pools of securitized non-QM loans against the backdrop of heightened recession concerns. Loans with lower DSCR ratios or higher original balances are underperforming and are being scrutinized for layered risk. Somewhat surprisingly, both high balance and low DSCR purchase loans are performing substantially better than both rate and cash out refinances. Across both cohorts, geography makes a difference as well.
High level credit metrics across the universe of securitized non-QM loans continue to improve. The average original LTV of loans securitized this quarter dipped below 70 for the first time in five years and is roughly four points lower than the pre-Covid peak of 73. Average borrower FICO scores have risen substantially as well. They have risen roughly 35 points from a low reading of 718 in the fourth quarter of 2020 to 753 on loans securitized this quarter. As overall credit metrics have improved, risk-based pricing on loans has tightened. Average Spread at Origination (SATO) on securitized loans has decreased from 200 bp in the third quarter of 2023 to just 96 bp this quarter (Exhibit 1).
Exhibit 1: LTVs fall and FICOs rise in non-QM trusts
Source: Santander US Capital Markets, CoreLogic Loan Performance
Lower DSCR and higher balance loans on the rise
Populations of lower FICO and higher LTV loans have decreased over time as originators have tightened underwriting guidelines in recent years against higher rates and slowing home price growth. Conversely, large loans, which have exhibited relative underperformance recently, and loans with lower DSCR ratios have increased as years of rapid home price appreciation have driven financed balances higher and DSCR ratios lower on securitized collateral. Large loans, those with original balances greater than $1 million, represents more than one-third of collateral securitized this quarter. Loans with lower debt service coverage ratios still make up a relatively small amount of securitized collateral, 7% of loans securitized this quarter, but their presence has steadily increased over the past five years (Exhibit 2).
Exhibit 2: Lower DSCR and larger loans increase as home prices rise
Source: Santander US Capital Markets, CoreLogic Loan Performance
Screening for risk mitigants on low DSCR loans
Broadly, investor loans in non-QM trusts are performing better than owner-occupied ones. However, loans underwritten to a lower DSCR are underperforming relative to the broader investor cohort. 60+ day delinquency rates on loans with DSCRs less than one touched 5.0% last month. Delinquency rates on higher DSCR loans were roughly 150 bp lower at 3.5%.
Given this, we isolated the sub-1.0 DSCR cohort and stratify it by loan attributes including LTV, FICO, loan purpose, SATO and other metrics to determine what secondary credit characteristics might mitigate the relative underperformance in lower DSCR loans. One initial observation is that despite tightening risk premia across the broad cohort of non-QM loans, originators appear to still be pricing risk appropriately given materially better credit performance in low SATO DSCR loans versus those with larger loan-level pricing adjustments. Just 1.75% of low DSCR loans with less than 100 bp of SATO were seriously delinquent last month while delinquency rates on loans with 300 bp of SATO or more were upwards of 7.0%.
One counterintuitive observation on the credit performance of low DSCR loans is purchase loans are performing substantially better than refinanced loans as delinquency rates on both rate/term rand cash out refinances are materially higher than those of purchase loans (Exhibit 3). This observation runs contrary to broader historical performance of mortgage loans as purchase loans generally carry higher LTVs, lower FICOs and no history of payment performance relative to loans that were refinanced for rate or term.
Exhibit 3: Purchase loans outperform refinances in the low DSCR cohort
Source: Santander US Capital Markets, CoreLogic Loan Performance
Screening for risk mitigants on higher balance loans
Similar to low DSCR loans, loan purpose matters when looking performance of larger loans albeit to a lesser degree. Large purchase loans are performing better than both rate and cashout refinancings. Serious delinquency rates on large purchase loans currently sit at 4.5%. Delinquency rates on refinanced loans are higher in the large loan cohort but unlike lower DSCR loans, there is a pronounced difference in performance between rate and cash out refinances as serious delinquencies are 130 bp higher on cash out refinances (Exhibit 4). Performance in rate refinanced loans has only recently decoupled from purchase loans as delinquency rates in that cohort began to spike earlier this year.
Exhibit 4: Refinances perform worse in larger loans as well
Source: Santander US Capital Markets, CoreLogic Loan Performance
Geography matters too
Geography-based performance trends were consistent across the low DSCR and large loan cohorts as New York and Florida-based loans exhibited elevated delinquency rates (Exhibit 5 and 6). Additionally, serious delinquency rates are rising in the mid-Atlantic region in both cohorts as well. Conversely, California-based loans appear to offer a credit risk mitigant in both cohorts analyzed as serious delinquency rates remain muted relative to other states. One notable between the two cohorts is serious delinquencies in low DSCRR loans in New York and Florida appear to be curing more meaningfully than delinquent loans with larger balances in those states.
Exhibits 5 & 6: New York and Florida-based loans underperform California across cohorts
Source: Santander US Capital Markets, CoreLogic Loan Performance
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.
