Fitch Warns Of Non-QM RMBS Higher Anticipated Losses

Mortgage News March 21, 2023

According to a recent report from Fitch Ratings, the rising issue of housing affordability, caused by increasing mortgage rates and high home prices, has led to originators producing more affordability products. This has resulted in expected losses in non-qualified mortgages (non-QM) to rise. Affordability products, which are designed to satisfy the Ability to Repay (ATR) Rule, provide borrowers with the ability to qualify for loans and make monthly payments with features such as long terms to maturity, interest-only periods, adjustable rates, and balloon payments. While most non-QM loans are 30-year fixed-rate loans, a growing number of mortgages now have affordability product features.

Fitch Ratings believes that the resurgence of affordability products, although similar to those seen in the 2008 financial crisis, will not result in a similar deterioration in performance. Although there are now measures in place to prevent a recurrence of the private label US RMBS market collapse, lenders must comply with stricter lending and disclosure regulations, such as the ATR Rule and TRID. Fitch forecasts greater stressed losses for affordability products and modifies projected losses based on the findings of third-party review (TPR) firms that assess credit, compliance, valuation, and data integrity on loans involved in new US RMBS transactions. TPR firms also report any deviations from the originator’s standards.

Although affordability has decreased, the credit box for non-QM tightened in the first quarter of 2023 compared to the same period in 2020. The weighted average FICO score rose by 20 points to 741, while the debt-to-income ratio (DTI) decreased by 2% to 34%. However, Fitch reviewed eight Fitch-rated non-QM issuers and found that the higher volume of affordability products has led to a decline in the weighted-average FICOs and an increase in weighted-average CLTVs in non-QM RMBS transactions. This indicates that there has been a change from refinancing to purchasing activity, resulting in higher expected losses on average. Furthermore, there has been an increase in the concentration of debt-service coverage ratio (DSCR) loans in issuer pools since January 2022. Originators are targeting DSCR product borrowers at a higher rate to drive business, as the spike in interest rates has led many potential home buyers to continue renting, resulting in a booming rental market.

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