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Non-QM lending is making a comeback

Impairments reach pre-pandemic levels in credit risk transfers

Even with total credit risk transfers (CRT) and non-QM lending trending down due to seasonality, some observers are predicting a strong beginning to 2021.

Officials with dv01, a lending markets analytics company, remain encouraged by low levels of new impairments, which reached pre-pandemic levels in both CRT and non-QM.

Vadim Verkhoglyad, dv01 vice president and co-head of research and publication, said modifications should conclude in the upcoming months and the industry shouldn’t expect any surprises.

“All of these factors further the broad theme we have echoed across our reports, which is consumers and homeowners entered COVID-19 in robust financial health and have continued to perform as such – even through quarantines, massive unemployment, and decreased stimulus benefits,” Verkhoglyad said.

A recent dv01 report showed that, among data collected at the end of November, the change in non-QM impairments from last February is still substantially higher than the change in U-6 unemployment. That’s significant, since November non-QM impairments declined by 20 basis points month-over-month to 11.3%, per the report.

Mike Fierman, managing partner and co-CEO of Angel Oak, recently told HousingWire he expects the non-QM market in 2021 to grow quickly as the economy recovers from the pandemic.

He noted that, in a normal year, a healthy non-QM market should report approximately $300 billion in originations per annum. In 2020, Fierman said, non-QM origination totaled around $18 billion, so there is plenty of room for growth.

“Another current market dynamic affecting non-QM volume is historically low interest rates,” he said. “Many originators are focusing on agency refinances as rates remain very low. The low-rate cycle will eventually change and originators will need to add new mortgage programs to their offerings to remain relevant to their client base.”

Other key stats from dv01’s recent report:

  • New impairments in CRT loans were 0.57% and are back to pre-pandemic averages
  • New impairments dropped 91% from their April peaks
  • Prepayments in CRT fell to 44.6%, largely due to seasonality
  • Performance among bank statement loans worsened in November, while other types continued to improve

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