By the Numbers
Distilling layered risk in non-QM MBS
This material is a Marketing Communication and does not constitute Independent Investment Research.
Despite rapid growth in originations, layered risk broadly remains contained. However, certain layered risk profiles do remain relatively elevated. Borrowers whose debt burdens rise after taking equity out of their homes continue to make up a meaningful amount of loans securitized in non-QM trusts. However, lower FICO borrowers who tap equity may pose the most meaningful risk.
Weighted average credit metrics generally do a poor job of quantifying credit risk in a pool of loans as dispersion away from that average means there can be a larger population of higher risk loans being masked by a large population of pristine ones. Instead, many investors focus on the credit ‘tail’ of a given pool. Borrowers’ LTVs, credit scores, DTIs along with the purpose of the loan can be viewed in isolation. But they are more frequently viewed collectively to show the amount of ‘layered’ credit risk in a given collateral pool. Historically, the presence of a second or third risk in a cohort of loans has signaled substantially worse credit performance than the presence of a single one.
Layered risk was fairly prevalent in non-QM loans securitized prior to 2021. Many borrowers had experienced prior credit events and the primary criteria by which a loan was deemed to be non-QM was based on a borrower’s DTI. As a result, loans with more than one risky attribute often made up 15% to 20% of the collateral backing a given transaction. Changes to the non-QM definition enacted in the first quarter of 2021 coupled with broad tightening in mortgage credit availability during the pandemic both reshaped and strengthened the overall credit profile of the non-QM borrower base.
Sizing up layered risk in recent vintages
Using LTV, FICO, DTI and loan purpose as screening criteria, high DTI cash out refinances are both the largest and most consistent layered risk exposure in non-QM trusts. These loans consistently make up more than 5% of pools securitized since 2021. High LTV, high DTI loans make up the second largest layered risk exposure in pools but have seen the balance of those loans decline more recent vintages. While lower FICO borrowers who have re-levered the equity in their homes consistently make up anywhere from two to three percent of non-QM pools (Exhibit 1).
Exhibit 1: Layered risk across recent vintage non-QM
Source: Santander US Capital Markets, Core Logic LP
Note: High LTV defined as >80 OLTV, Low FICO defined as =<680 FICO, High DTI defined as=>40 DTI, Purpose defined as cash-out refinance. Values are expressed as a percentage of original loan UPB securitized
Loans with more than two layered risks are sparingly found in non-QM trusts. The combination of low FICO, high DTI borrowers who took out cash when they refinanced their home is the most prevalent three-dimensional layered risk in non-QM trusts. At peak, they made up less than 1.5% of loans securitized in the 2021 and 2023 vintages and made up just 0.98% and 0.88% of loans securitized in 2024 and 2025 respectively.
A look at performance of layered risk loans
While high DTI cashout refinances remain the most prominent layered risk in non-QM trusts, there may be good reason why those balances remain relatively elevated. Namely, that DTI has not been particularly predictive of performance across cash out refinancings in these vintages of non-QM loans. In fact, certain cohorts of lower DTI cashout refinances are exhibiting the highest rates of seriously delinquent loans, while delinquencies on higher DTI cuts remain more benign (Exhibit 2).
Exhibit 2: Higher DTI cashouts do not exhibit markedly worse credit performance
Source: Santander US Capital Markets, Core Logic LP
Note: High LTV defined as >80 OLTV, Low FICO defined as =<680 FICO, High DTI defined as=>40 DTI, Purpose defined as cash-out refinance.
There are a couple of plausible explanations for why this may be the case. First and most likely is that the presence of layered risk likely comes along with some offsetting compensating credit characteristics. While these borrowers have increased their leverage and debt burden as a function of income, this does not consider that the borrower may have been able to demonstrate substantial assets or reserves or maintains substantially more equity than lower DTI cohorts even after taking cash out. Secondly, DTI, to date, has been a fairly weak predictor of credit performance, which may be due, in part, to the somewhat subjective nature of calculating a debt-to-income ratio.
The same can be said when looking at higher LTV, high DTI loans where some lower DTI borrowers are flashing substantially elevated delinquency rates. In the middle of last year, 60-day or greater delinquency rates on high LTV borrowers with 20 to 25 DTI ratios and 45 to 50 DTI ratios both hovered around 8.0%. Since then, serious delinquency rates on the low DTI cohort have climbed by roughly another 100 bp, while DQ rates on the high DTI cohort have fallen by roughly the same amount (Exhibit 3).
Exhibit 3: Delinquency rates relatively benign on high LTV, high DTI loans
Source: Santander US Capital Markets, Core Logic LP
Note: High LTV defined as >80 OLTV, Low FICO defined as =<680 FICO, High DTI defined as=>40 DTI, Purpose defined as cash-out refinance.
Conversely, the presence of cash out refinance loans to low FICO borrowers does appear to warrant concern, as lower FICO borrowers are performing substantially worse. Serious delinquency rates on cash out refis to borrowers with credit scores between 640 and 660 are in excess of 11%, while DQ rates on borrowers with FICOs between 660 and 680 are rapidly approaching 9%. This stands in fairly stark contrast to the ‘archetypal’ non-QM borrower whose credit score generally ranges from 720 to 740, where serious delinquency rates are just 5% (Exhibit 4). So, while these loans represent one of the smaller cohorts of two dimensioned layered risk, they may prove to be much more meaningful in terms of fundamental performance.
Exhibit 4: Low FICO cashout refinances are a meaningful layered risk
Source: Santander US Capital Markets, Core Logic LP
Note: High LTV defined as >80 OLTV, Low FICO defined as =<680 FICO, High DTI defined as=>40 DTI, Purpose defined as cash-out refinance.
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 © 2026 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.
