By the Numbers
Northeast, cash-out refis drive new delinquencies in non-QM MBS
This material is a Marketing Communication and does not constitute Independent Investment Research.
Serious delinquency rates amongst non-QM loans have edged higher through the first half of this year. Loans in the Northeast have seen serious delinquency rates spike in recent months. Delinquencies on loans to borrowers who have re-levered pent-up equity have spiked as well. And both cohorts are relatively new contributors to higher delinquency rates.
The population of seriously delinquent loans across the non-QM cohort remains relatively small, comprising slightly more than 3.5% of the outstanding universe of loans (Exhibit 1). While the nominal level of delinquencies remains benign, the trend over the past six months has been a steady grind higher. The recent rise in delinquency could be attributed to a couple broad factors. First, cohort level prepayment rates continue to increase. As a larger percentage of the outstanding universe prepays, the same nominal amount of loans rolling in and out of various stages of delinquency or foreclosure will represent a larger percentage of that now smaller population. Secondly, a growing amount of the outstanding universe is seasoning along a credit ramp, including a large swath of 2020 and 2021 vintage transactions that are economically infeasible to call given the below market rates on the underlying collateral leaving delinquent loans that likely would have otherwise been called, in the observable population.
Exhibit 1: Non-QM delinquencies remain low but are steadily increasing
Source: Santander US Capital Markets, CoreLogic LP
Screening for drivers of recently rising delinquency rates
Cutting the non-QM universe by various collateral attributes shows underperformance in certain regions of the country. While much has been made of home price depreciation in certain areas of the Sun Belt and Texas, raising concerns about potential impact on fundamental performance, recent underperformance has been much mare acute in the Northeast (Exhibit 2). Serious delinquency rates in New York are now on top of those observed in Florida, with both observations sitting at roughly 4.6%. While serious delinquency rates in Massachusetts and New Jersey have both risen by roughly 1% over the past few months.
Exhibit 2: Non-QM delinquency rates rising in the Northeast
Source: Santander US Capital Markets, CoreLogic LP
Cutting the universe by loan purpose also shows some notable recent increases, particularly in cash-out refinancings. Seriously delinquent loans now make up more than 5% of all cash out refinances, with those loans performing markedly worse than both rate/term refinances and purchase loans (Exhibit 3). Delinquencies on rate/term refinances continue to decline from peak levels in the first quarter of last year, while delinquency rates on purchase loans continue to remain broadly subdued. Cutting the cohort of cash out refinances by occupancies shows owner-occupied cash-out loans exhibit substantially higher delinquency rates than investor cash-out loans (Exhibit 4).
Exhibits 3 and 4: Cash-out delinquencies rates rising with owner-occupied loans driving higher rates
Note: the second graphic shows only cash-out refi loans further split by occupancy status.
Source: Santander US Capital Markets, CoreLogic LP
The usual suspects
While loans in the Northeast and owner-occupied cash-outs are relatively new contributors to rising delinquencies, other cohorts flagged in the past continue to underperform, namely 2023 vintage loans and loans with larger balances. Serious delinquency rates on loans originated in 2023 are rapidly approaching 9.0%, roughly 250 bp higher than any other vintage (Exhibit 5). The vintage is marked by rapidly accelerating delinquencies once the cohort was roughly 12 months seasoned, resulting in a much steeper ramp than any other vintage (Exhibit 6).
Exhibits 5 and 6: 2023 vintage collateral continues to underperform
Source: Santander US Capital Markets, CoreLogic LP
Performance trends in larger loans have continued to hold in recent months as well, with a bit of a twist. Loans with balances greater than $1 million continue to perform the worst of all loan balance cuts, with serious delinquency rates hovering around 5%. Historically, loans with balances between $800,000 and $1 million have been lumped in with the larger loan cohort. However, performance in that cohort has improved, with delinquencies declining and then leveling out to some extent. Conversely, delinquency rates have been steadily increasing in the $600,000 to $800,000 cohort, with delinquency rates on the two converging last month around 4.25%.
Other credit considerations
Broadly, investor loans continue to perform better than owner-occupied ones. Serious delinquency rates on owner-occupied loans sit roughly 110 bp above those of investor loans at 4.3% and 3.2% respectively. With regards to underwriting, ‘property based’ lending, like CDFI and low ratio DSCR loans continue to exhibit the highest levels of seriously delinquent loans, although ‘no ratio’ CDFI loans that do not hold the originator to an Ability-to-Repay standard are mainly an artifact of earlier vintage non-QM. Within the more nuanced categories of underwriting, P&L and 1099 statement underwrites and CPA letters continue to underperform relative to bank statement, asset depletion and higher ratio DSCR loans.
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