By the Numbers
Analyzing the recent rise in seasoned non-QM securitizations
This material is a Marketing Communication and does not constitute Independent Investment Research.
A spate of deals has hit the market recently backed by seasoned non-QM loans from recently called non-QM trusts. The newly minted trusts are borne of what appear to be substantial incentives for sponsors but have met with some heightened scrutiny from investors. On a positive note, many of these loans carry substantially lower LTVs than when they were first securitized and the borrowers have demonstrated good payment history. Naysayers will posit there has been some degree of downward FICO drift, and the deals carry larger swaths of high LTV loans than deals backed by newly originated collateral.
Thoughts on sponsor incentives
Sponsors of non-QM trusts issued in 2022 have begun calling some of those transactions. And loans previously backing called trusts are being re-packaged into newly minted securitizations. It seems likely that this trend may become pervasive across a larger number of issuers as there looks to be substantial incentives to call many of these trusts.
The rapid rise in interest rates through 2022 substantially hampered securitization economics as the combined impact of rising benchmark rates, particularly on the front end of the yield curve, coupled with widening credit spreads, pushed up liability costs and crammed down available excess spread and securitization advance rates. Said another way, sponsors’ ability to apply leverage to loans they purchased was mitigated to some degree given the narrowing gap between coupons on assets and liabilities of these trusts. In many instances, sponsors were only able to achieve a securitization advance rate commensurate with selling down to the ‘single A’ bond.
And sponsors’ leverage on these assets has further decreased through amortization and prepayments of loans originally securitized. As such, sponsors have substantial incentives to call these deals and re-lever the loans through a new securitization; given lower front-end benchmark rates, tighter credit spreads and the ability to sell further down the capital structure than they could roughly three years ago.
A look at the seasoned loans
Year-to-date seasoned non-QM issuance has tallied just over $3 billion across seven deals with Invictus’ VERUS shelf accounting for roughly half the supply. The deals are generally marked by lower WAC loans as 2022 vintage deals generally exhibited some WAC dispersion and many of the higher WAC loans in the original trust have prepaid, leaving a ‘tail’ of lower coupon loans. Gross WACs on recent seasoned loan securitizations range from 5.85% to 7.42% with VERUS 2026-R3 being the lone deal whose WAC is roughly in-line with newly originated loans (Exhibit 1). Unsurprisingly, there is a fairly clear relationship between seasoning and WAC, and more seasoned deals generally carry lower gross coupons.
At present, it’s somewhat difficult to ascribe value to seasoning in seasoned non-QM collateral. In agency space there is a long history of observations that can quantify prepayment ‘burnout’ on seasoned loans, a phenomenon where seasoned loans exhibit a more muted response to prepayment incentive than newly originated ones. Given the 3-year optional redemption structure common to non-QM securitizations, there is a dearth of observations on loans seasoned 40 months or more. If these seasoned loans do perform like comparably seasoned agency collateral, it should lower option cost and improve OAS on these pools. At an absolute minimum, the substantial seasoning mitigates extension risk.
Exhibit 1: Collateral WACs vary on seasoned loan securitizations
Source: Santander US Capital Markets, Fitch Ratings, S&P, Morningstar
From an LTV perspective, investors may have somewhat mixed opinions on risk related to borrower leverage in these seasoned transactions. At a high level, these loans were underwritten to low LTVs and have experienced meaningful deleveraging since origination. Original combined LTVs on seasoned loans securitizations range from 68.3 to 73.5 and updated mark-to-market cLTVs, including loan amortization, are between 58 and 68.7.
However, the presence of higher LTVs loans in some of these seasoned transactions is more pronounced when compared to securitizations backed by newly originated loans. While concentrations of loans with cLTVs greater than 80 are in line with current securitizations, loans with cLTVs greater than 90 are greater. So, while these pools holistically are less levered than new production, the tail of high LTV loans is, in some cases, meaningfully larger (Exhibit 2).
Exhibit 2: LTVs fall but tail of high LTV grows in seasoned loan trusts
Source: Santander US Capital Markets, Fitch Ratings, S&P, Morningstar Note: cLTV stratifications unavailable for OBX 2026-R1 trust
One substantial departure from other seasoned loan securitizations like re-performing loans or called legacy transactions is increased reliance on Automated Valuation Models (AVMs) to provide updated valuations and LTVs for the majority of loans securitized in these seasoned trusts. Historically, securitizers of seasoned loans frequently acquired updated Broker Price Opinions (BPOs) to provide an updated valuation to the securitized loan. The combined presence of larger concentrations of higher LTV loans and greater reliance on AVMs coupled with potentially limited transparency as to what loans were valued using each methodology should push risk premiums on these deals higher than on the run transactions, particularly in more credit sensitive parts of the capital structure (Exhibit 3).
Exhibit 3: Seasoned non-QM securitizations rely heavily on AVMs
Source: Santander US Capital Markets, Fitch Ratings, S&P, Morningstar Note: AVM and BPO valuation percentages unavailable for MCMLT 2026-R1 and GSMBS 2026-R1
Another metric evident in seasoned deals that has can be viewed through a bullish or bearish lens is borrowers’ payment history and credit scores. To the positive, the overwhelming majority of these pools are at least 24-months current pay and historical observations of payment velocity suggest that it is more predictive of future delinquency than even FICO. On the flip side, updated, non-zero weighted average FICO scores on these deals range from 702 to 716, substantially lower than those of newly originated securitized loans. Furthermore, these pools have, on average, seen FICOs drift from the mid-730s to current levels.
Thoughts on valuation
While only a handful of these deals have been issued to date, a basis is beginning to emerge at the top of the capital structure, with seasoned loan ‘AAA’s trading roughly 10 bp wider than comparable transactions backed by newly originated loans. From a prepayment perspective, while these seasoned loans may carry a lower option cost from a combination of burnout and limited extension risk given the seasoning, investors have shown a clear preference for higher WAC collateral since the outbreak of the conflict in the Middle East as they look to mitigate call-related extension risk against the backdrop of higher benchmark rates and increased volatility. Given this, lower WAC seasoned deals will likely continue to trade wide of new production for the foreseeable future.
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