By the Numbers
Seasoned and owner-occupied loans continue to drive non-QM delinquencies
This material is a Marketing Communication and does not constitute Independent Investment Research.
Serious delinquencies across the universe of non-QM loans, which declined through the spring, have started to edge higher again. Certain seasoned cohorts, particularly 2023 vintage loans, are contributing disproportionately to higher delinquency rates across the broader universe. Owner-occupied loans, cash-out refinances and large loans are pushing delinquency rates higher as well.
Tracking the cohort over time
Loans more than 60 days past due accounted for roughly 3.5% of the entire non-QM universe last month, ticking up modestly after falling through most of the spring. The seasonal uptick in delinquencies in summer months is broadly consistent with observations in prior years with 2025 being the outlier, when delinquency rates steadily fell throughout most of last year (Exhibit 1).
Exhibit 1: Summer months tend to bring higher non-QM delinquency rates
Source: Santander US Capital Markets, CoreLogic Loan Performance
Cohorts contributing to elevated delinquencies
Serious delinquency rates on the 2023 vintage have breached 8.0% and continue to trend higher (Exhibit 2). Substantial relative underperformance in this vintage is likely a confluence of a few factors. The 2023 vintage is marked by recent peaks in both interest rates and home prices, making it the least affordable based on those metrics. The vintage also coincided with a period of increased credit availability and some degree of credit-score inflation as originators re-opened their credit boxes in the wake of Covid-era tightening. Potential borrowers were able to strengthen their household balance sheets as mortgage forbearance and other forms of stimulus allowed them to de-lever other household liabilities. Finally, there is likely some swath of 2023 vintage borrowers that are trapped in higher rate mortgages, operating under the belief that they could refinance and materially reduce their debt burdens at some point in the not-too-distant future.
Exhibit 2: 2023 vintage loans drive cohort- level delinquencies
Source: Santander US Capital Markets, CoreLogic Loan Performance
While the contributors to higher delinquency rates in the 2023 vintage are fairly transparent, underperformance in owner-occupied loans relative to investor loans are more opaque, although there is at least one plausible explanation. Looking solely at occupancy, serious delinquency rates on owner-occupied loans are nearly a full percentage point higher than investor loans, at 3.96% and 3.07% respectively. Both historical performance and rating agency credit enhancement levels suggest that owner-occupied loans should perform better than investor loans, but that is not what the market is seeing play out.
Exhibit 3: Owner-occupied loans performing worse than non-QM investor loans
Source: Santander US Capital Markets, CoreLogic Loan Performance
One possible explanation for this is that rents, at least currently, have more elasticity than incomes of owner-occupied borrowers. In effect, rents on investment properties can generally be repriced annually to pass through variable costs of home ownership such as rising property taxes or insurance premiums. Conversely, an owner-occupied borrower’s income is likely not rising commensurately with those non-fixed costs, potentially putting more pressure on the household balance sheet which may be translating to higher delinquency rates on owner-occupied loans.
Two other attributes flashing signs of relative weakness are loan purpose and balance, where cash-out refinances and higher balance loans are flashing elevated delinquency rates. Serious delinquency rates on cash-out refinances currently sit just north of 4.5%, a full percentage point greater than rate-and-term refinances and nearly two points higher than purchase loans (Exhibit 4). Similarly, loans with original balances greater than $1 million are performing substantially worse than smaller loan balance loans.
At the start of last year, delinquency rates on loans with balances between $800,000 and $1 million were comparable to those with balances greater than $1 million, with both cohorts elevated relative to smaller balance loans. The two cohorts subsequently decoupled, with delinquency rates on loans with balance greater than $1 million continuing to rise while delinquencies on the $800,000 cohort began to converge with smaller balance cohorts (Exhibit 5). Now delinquency rates on loans with balances greater than $1 million are a full percentage point higher than the $800,000 to $1 million balance cohort, at 4.8% and 3.8% respectively.
Exhibit 4 and 5: Cash-out refinances and large loans pushing delinquencies higher
Source: Santander US Capital Markets, CoreLogic Loan Performance
Collectively, these data points may be signs of marginally weaker consumer balance sheets. Borrowers’ need to extract equity that they may be having difficulty servicing could be a sign of mild financial stress. And elevated delinquency rates on higher balance loans may suggest that rising costs on housing and general household expenditures may be putting a strain on some households at the higher end of the income spectrum. With that said, VantageScore-based leading indicators of credit stress including revolving balances, utilization rates and new accounts remain broadly benign across nearly all consumer credit cohorts, so this may be more of a transitory phenomenon than a canary in a coal mine.
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