By the Numbers
Reviewing credit concerns on short-term rental loans in non-QM MBS
This material is a Marketing Communication and does not constitute Independent Investment Research.
Short-term rental loans, while a small share of non-QM deals, have been getting greater scrutiny by investors. But concerns about the credit of these loans may be somewhat overblown. Aggregate serious delinquency rates are declining, and elevated delinquency rates are mainly in more seasoned loans. However, a varied and changing regulatory landscape for short-term rentals could prove a threat to the rental business model in certain cities. There nevertheless may be a deep bid for those homes from owner-occupants and second home buyers if investors are ultimately forced out.
As the non-QM market has evolved over the years, investor loans underwritten to a properties’ rental income have become increasingly prevalent. While the overwhelming majority of debt service coverage loans are underwritten to a long-term stabilized or projected monthly rental income, similar to commercial real estate underwriting, a subset of loans is being underwritten to non-stabilized income, reliant on higher turnover, shorter term rentals (STRs).
Changes to the hospitality and travel industry brought on by companies like Airbnb and VRBO, which allow individuals to rent a primary or secondary home or investment property on a short-term basis, have affected the non-QM lending market to some degree as well. Investors seek permanent financing for properties acquired with the intent of being rented on a short-term basis and have turned to the non-QM market for financing. Concerns around performance of these loans have by and large been two-fold, focused on fundamental cash flow and potential policy risk.
From a fundamental cash flow perspective, bond investors have expressed concerns about both stabilization rates and rental income volatility both in the underwriting assumptions and future cash flow of these loans. Additionally, investors have flagged growing incidences of city-level regulation which may hurt the short-term rental business model. While regulations vary, cities like New York, Miami, Nashville, San Diego and Los Angeles have enacted regulations which may require that the property be an owner-occupied primary residence, subject the property to certain permitting and zoning restrictions, or subject the property to caps on the number of days it can be rented.
Tracking performance to date
Over the past two years, serious delinquency rates on loans secured by short-term rental properties have been substantially more volatile than the broader cohort of non-QM. Serious delinquencies on STRs have ramped faster than the broader cohort, increasing by roughly four points over a roughly eight months from the second half of 2024 through the first quarter of 2025. But serious delinquencies on this cohort have fallen by roughly 150 bp from their peak and currently sit at 2.86%, roughly a point lower than the broader non-QM cohort (Exhibit 1). So, while broad-based delinquencies for the cohort continue to edge higher, performance of STRs has by and large been gradually improving.
Exhibit 1: Delinquencies on STRs rise rapidly, but ultimately fall below broader cohort
Source: Santander US Capital Markets, CoreLogic LP
Improved performance driven by new originations and larger loans
There look to be two primary forces pushing serious delinquencies lower across STRs. First, more recent vintage loans are exhibiting significantly better credit performance than older ones. More recently originated loans were likely underwritten with a more complete picture of the evolving and enhanced regulatory framework for STRs and as a result, are more conservatively underwriten. And while large, alternative documentation loans have broadly underperformed in non-QM, larger STR loans are bucking that trend, and have seen serious delinquency rates fall substantially over the past year (Exhibit 2 and 3).
Exhibit 2: Serious delinquency in non-QM STRs by vintage
Source: Santander US Capital Markets, CoreLogic LP
Exhibit 3: Serious delinquency in non-QM STRs by loan size
Source: Santander US Capital Markets, CoreLogic LP
Breaking down performance by state
Focusing on some of the states where there have been heightened regulation put in place on STRs, delinquency trends are decidedly mixed. Despite enhanced regulation, delinquency rates on STRs in California spiked to nearly 5% in September of last year but have subsequently fallen to just 1.27%. Serious delinquency rates in New Jersey are the most volatile with some apparent seasonality, falling in summer months and increasing through the fall and winter, likely implying these properties rely primarily on summer rental income. Serious delinquency rates on STRs in Florida plateaued at roughly 7% through most of last year before falling by nearly three percentage points (Figure 4).
Exhibit 4: Tracking STR delinquencies by state
Source: Santander US Capital Markets, CoreLogic LP
Identifying larger concentrations of STRs
Unsurprisingly, larger concentrations of STRs are generally localized to deals backed exclusively by investor collateral. Some deals issued by VERUS, COLT and MSRM who issue in ‘investor only’ deals carry the largest concentrations of STRs. Admittedly, this may be somewhat of an incomplete picture as the level of disclosure on STRs may vary based on sponsor and underwriter (Exhibit 5).
Exhibit 5: Identifying deals with larger concentrations of STRs
Source: Santander US Capital Markets, CoreLogic LP
Potential implications of policy risk
With more cities implementing enhanced regulations on STRs including the types of properties that can be rented, caps on the number of days the property can be rented and zoning and permitting restrictions, policy risk on STRs is difficult to both predict and model. More onerous caps on the number of days a property can be rented can impair rental cash flows. And occupancy restrictions could completely preclude investment properties from being rented on a short-term basis. It nevertheless seems likely that these types of investment properties carry limited risk of loss as they are generally low LTV at origination and are located in higher-demand MSAs, where demand for the property is likely elevated from both owner-occupant and second home buyers. Given this, enhanced restrictions on STRs appear more likely to drive prepays than losses in deals that carry larger concentrations of these loans.
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