By the Numbers
Flashing signs of weak credit in 2023 prime and non-QM MBS
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.
Investors concerned about rapidly rising delinquencies have been able to breathe a bit easier since the spring as the pace has fallen in recent months across both prime and expanded credit borrowers. However, there has been one notable exception to improved performance, namely the 2023 vintage where serious delinquency rates continue to tick up. Elevated delinquencies within the vintage look to be driven by owner-occupied loans with higher debt burdens.
Delinquency rates across both prime and expanded credit loans securitized in RMBS trusts have declined in recent months. Concentrations of loans more than 60 days past due in prime trusts rose to 0.47% in April but have since leveled off and begun to decline slightly, sitting a t 0.45% as of the September remittance (Exhibit 1). Expanded credit, or non-QM, collateral saw delinquencies of 60 days or more spike to nearly 4.0% of the cohort but have declined by nearly 50 bp over the past few months. Recent declines in delinquency rates are, to some extent, attributable to previously observed seasonal improvements in delinquency rates as tax refunds received in the spring can be applied to delinquent payments.
Exhibit 1: Prime and non-QM delinquencies have declined in recent months
Source: Santander US Capital Markets, CoreLogic LP
While cohort level performance has improved for both prime and expanded credit loans, it varies based on vintage. Loans securitized in 2023 appear to be a particular pocket of weakness relative to others. Serious delinquencies in both prime and non-QM loans securitized two years ago have ramped faster than other vintages and in the case of the non-QM cohort sits as the highest absolute serious DQ rate of just over 6.0%, even higher than more seasoned loans (Exhibit 2).
Exhibit 2: 2023 vintage loans performing worse across both prime and non-QM
Source: Santander US Capital Markets, CoreLogic LP
Drivers of delinquencies in the prime 2023 vintage
Looking at relative performance within the prime 2023 vintage, certain borrower attributes such as loan size or occupancy which I have flagged as being indicators of weaker credit performance in non-QM, have even more broad-based exposure in the jumbo cohort as it is almost exclusively backed by owner-occupied loans with large balances. Relative underperformance within the 2023 vintage is further marked by loans with more onerous debt burdens. Loans with higher note rates and ones where the borrower re-levered their equity through a cashout refinancing are performing markedly worse than lower note rate purchase and rate refinanced loans.
Cutting the 2023 cohort shows a fairly stark disparity in performance when sorting on note rate. Serious delinquencies on prime loans with gross WACs between 6.0% and 7.0% sit at roughly 80 bp while those with higher note rates are performing materially worse. Arguably the presence of higher not rate loans would suggest that these loans are riskier and should perform worse, however given the relatively pristine borrower profile, any risk-based pricing adjustments should be fairly minimal. As such, it appears that higher delinquency rates may simply be borne of the increased debt burden associated with a higher rate loan. Borrowers who took on additional debt burdens in the form of a cashout refinancing in 2023 are performing worse as well. Serious delinquencies on cashout refis are upward of 2.5%. Purchase loan delinquencies are roughly one-third of cash out refis and rate refinancing delinquencies are roughly half those of cash outs (Exhibit 3).
Exhibit 3: High note rate and cashout refinances underperform
Source: Santander US Capital Markets, CoreLogic LP
Drivers of delinquency in the 2023 non-QM vintage
A look at relative performance within the 2023 non-QM cohort shows that occupancy and loan purpose look to be indicators of weaker performance as owner occupied loans and, similar to prime jumbo, cash out refinances are underperforming relative to investor loans, purchases and rate financed loans. Serious delinquency rates on owner occupied loans are in excess of 7.0%, 200 bp more than those of investor loans. Delinquency rates on cash out loans within the vintage are nearly 10% and almost 600 bp greater than current delinquency rates on purchase loans within the vintage (Exhibit 4).
Exhibit 4: Occupancy and loan purpose drive higher delinquencies in 2023 non-QM
Source: Santander US Capital Markets, CoreLogic LP
DTI an unreliable predictor of deliquency
While it appears that higher debt burdens are contributing to elevated deliquency rates across both prime and non-QM loans, DTI ratios continue to be a fairly poor predictor of delinquency (Exhibit 5). Across both exposures, loans with relatively low DTI ratios appear just as likely to exhibit elevated delinquencies as those with higher ones. There are likely a couple plausible explanations as to why this may be the case but the biggest may be inconsistency in how different originators calculate these ratios.
In both cohorts, the lack of linkage between elevated debt burdens and higher deliquency rates likely speaks to the incongruity as to how DTIs are calaculated across originators. Unlike a FICO score and to some extent LTV, there is some element of interpretation and subjectivity in calculating a borrowers’ DTI and as such may ultimately not prove to be a reliable metric when predicting a borrowers probability to default.
Exhibit 5: DTI a poor predictor of deliquency in both prime and non-QM
Source: Santander US Capital Markets, CoreLogic LP
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