The Big Idea
Lessons learned in private-label MBS in 2025
This material is a Marketing Communication and does not constitute Independent Investment Research.
The private-label MBS market showed us something this year about the overall resilience of both the market for funding non-QM and the non-QM borrower. It also showed counterintuitively that just because borrowers qualify for a larger mortgage doesn’t necessarily make them better borrowers.
#1: Liberation Day volatility did not seize the primary issuance and funding markets
The private-label MBS market was not immune to the volatility observed in both equities and rates on the heels of broad reciprocal tariffs announced April 2. However, despite the volatility, primary issuance and funding markets continued to function and secondary spreads initially gapped tighter in the wake of the 90-day pause on tariff implementation (Exhibit 1).
Exhibit 1: Primary issuance and spreads snap back quickly in the face of heightened volatility
Source: Santander US Capital Markets, CreditFlow
The resilience of the non-QM market can be attributed in part to a somewhat unique market dynamic, namely that steady origination of the asset does not rely solely on capital markets execution. One integral lesson learned through the spring volatility experienced was that while capital markets spreads widened, they were governed, to some extent, by a competing bid from life insurers. Life companies have been the biggest driver of growth in the non-QM market through direct investments in both whole loans and securities as well as indirect investments in both whole loans and securities through Separately Managed Accounts (SMAs) managed by both traditional and alternative asset managers. Insurer demand for non-QM whole loans has proven to be somewhat of a governor on capital markets execution during bouts of volatility. Their stickier, more stable liability structures have allowed them to be a more consistent and stable bid for loans in bouts of broader market risk-off sentiment as they use a combination of Federal Home Loan Bank advances and fixed annuities to fund loan purchases.
#2: Concerns about fundamental credit in non-QM were overblown
Earlier this year the market began to raise concerns about fundamental credit as the amount of seriously delinquent non-QM loans began to creep up in the spring of this year. In hindsight, those concerns look overblown as delinquency rates have plateaued and the spike earlier this year looks mainly seasonal. The steadying of performance across non-QM borrowers stands in stark contrast to other sectors of mortgage lending where the population of seriously delinquent loans continues to increase substantially. Loans more than 60 days past due guaranteed by FHA across recent vintages have continued to increase throughout most of this year and saw a substantial spike this month, although the spike is mainly due to changes in FHA loss mitigation rules (Exhibit 2).
Exhibit 2: Delinquency rates plateau in non-QM, continue to increase in FHA
Source: Santander US Capital Markets, Ginnie Mae, CoreLogic LP
With that said, the 2023 vintage looks to be somewhat of an outlier in its outsized delinquency rates. These elevated delinquency rates most likely come from borrowers who purchased homes against the backdrop of significant Covid-driven home price appreciation and freshly minted elevated mortgage rates. These borrowers probably believed elevated mortgage rates would pass and they would be able to refinance into a lower rate in the not-too-distant future. Stubbornly elevated mortgage rates, increases in non-fixed costs of home ownership and broad- based inflation look to be weighing on this cohort of borrowers and may continue to do so absent a material decline in mortgage rates.
#3: A paradigm shift in the performance of larger loans
In the run-up to the Global Financial Crisis, conventional wisdom said that large loans bore less credit risk than smaller ones as larger loans generally went to more affluent borrowers who could afford bigger homes and heftier downpayments. Smaller loans were also problematic since fixed costs of foreclosure and liquidation would represent a higher loss severity on default. Fast forward to today and there is a discernible difference between large and small loans with more large loans rolling into serious delinquency. That paradigm has flipped in recent expanded credit lending, and larger loans are rolling seriously delinquent with greater frequency than smaller ones (Exhibit 3).
Exhibit 3: Larger loans exhibit elevated delinquencies in non-QM trusts
Source: Santander US Capital Markets, CoreLogic LP
Underperformance in larger loans is localized to states that have seen both more muted home price appreciation and more meaningful increases in non-fixed costs of home ownership like New York, Florida and Texas. The underperformance of these loans likely came as somewhat of a surprise to most investors and may continue to weigh on performance into next year.
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.
