Homeowners considering refinancing their homes are becoming more hesitant since mortgage rates have more than doubled in the last year. Why refinance when your current mortgage rate is lower than the rate offered on a refinanced loan?
A similar issue currently affects non-qualified mortgage securitizations.
Duration or extension risk – loans that do not pay off at the predicted levels at issuance — is a growing issue with non-QM securitizations, according to Standard & Poor’s.
Similarly, Kroll Bond Rating Agency LLC (KBRA) warned earlier this month that there is a rising backlog of Non-QM residential mortgage-backed securities (RMBS) that are “callable” or “redeemable,” but have not yet re-entered the market.
According to the research, 27 securitizations are redeemable but have not yet been called, with a total outstanding amount of a little under $3 billion. It’s a growing issue that reflects both the volatility of the securities market and the increasingly inadequate market for securitizing Non-QM loans.
Aside from market instability, another reason for the backlog is that the market for Non-QM securitizations is smaller than the market for qualifying mortgage securitizations since government-sponsored firms such as Fannie Mae and Freddie Mac cannot acquire them. As a result, the capacity to get funding for Non-QM loans through securitizations is entirely dependent on the private market.
The performance of non-qualified mortgage securitizations was unaffected by capital market volatility in the first half of 2022, according to the DBRS Morningstar report, but investors should not be complacent.
Throughout the pandemic, the non-QM market remained extraordinarily robust. However, increasing interest rates and other economic concerns have begun to weigh on the once-thriving industry.
The present rising rate environment reduces the value of existing loans and raises the needed coupon on newly securitized classes, disincentivizing issuer redemption. Previous Non-QM securitizations have often been called within a year of being redeemable, which accords with senior-class investor expectations, but an extension is more likely in the absence of structural measures such as step-up coupons.
Non-QM financing initiatives for creditworthy homeowners who do not meet existing Qualified Mortgage requirements are crucial to the long-term expansion of the housing market in the United States. Despite loan purchasers’ increased demand for non-QM loans, market volatility has left mortgage originators searching for liquidity in this burgeoning market area. The multi-buyer to multi-seller platform from AFL Funding delivers dependable liquidity by allowing originators to access several top buyers through a single counterparty.