MReport December 2019

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M R EP O RT | 63 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Non-QM Bond Market Heats Up Non-QM bond issuances have been on the rise, echoing some similar properties of the pre-recession subprime mortgage- backed bond market, but this time may be different. N on-QM bond issuances have been on the rise, Bloomberg reports. But even amidst this posi- tive move, some skeptics worry about non-QM's performance along the road ahead. With misconceptions and negative pre- recession associations lingering, how is non-QM paving the way for responsible lending to bor- rowers who don't fit within the QM bucket, without the pitfalls of subprime? According to Barclays, this surge comes as initial indications of delinquency rates on the loans are starting to emerge, about 3% to 5% in some bonds. However, Bloomberg states that the non-QM bond market is too small for now to cause the kind of broader disruptions that subprime bonds did before the recession. The bonds themselves also have more safeguards for investors than they used to. According to a Fitch Ratings analysis, an average of 36% of principal would have to be lost before the top-rated slice took a hit. The cushion in crisis-era "alt-A" bonds with the same rat- ing was just 6%. Speaking with MReport, Denis G. Kelly, SVP of Sprout Mortgage, recently noted that non-QM loans are a different breed. "Non-QM loan performance is very strong right now," Kelly said. "That's the number one. Are you making responsible loans? The misconception may be that they equate it to what was happening in 2006, 2007, 2008—those were a very different type of loan." Aaron Samples, CEO of First Guaranty Mortgage, echoed this sentiment, noting the misconcep- tions surrounding non-QM loans as "subprime." "The biggest challenges lenders face today are around the stigma of the product being misunder- stood as a subprime product," Samples told MReport. According to the American Enterprise Institute, the non-QM market is the fastest-growing segment of non-agency residential mortgage-backed securities in the U.S., despite still being a rela- tively small slice of the pie. The non-QM market is on track to double, or even triple, last year's securitization issuance within this year. S&P found that there have been 20 odd transactions year-to- date, totaling over $6 billion in issuance, which is already almost double 2017's full-year volume. S&P also notes that, when com- pared to other RMBS categories, non-QMs have prepaid quicker, often soon after loan origination. The report found a conditional prepayment rate (CPR) 35%. "It's not the subprime we remember from 2006 to 2007," said Mario Rivera, Managing Director of the Fortress Credit Funds business, which has bought non-QM bonds. "It's more of a second or third inning of non-QM. We're getting the best collateral before the more aggressive lending comes in."

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