Non-qualified mortgage (non-QM) performance broadly weakened in April as seasonal improvements from March faded and early-stage delinquency roll rates rose.

Elevated volatility in financial markets due to the Iran war has made non-QM loan pricing and secondary execution more challenging in recent months, industry sources tell Scotsman Guide. But underwriting and loan performance has remained resilient overall, they say.

“I don’t think you’re going to see much contraction in the credit box, but I don’t think you’re going to see much expansion either,” says John Wise, who leads national production for Newfi Wholesale. “The highest delinquencies are still coming from the lowest-documentation programs.”

Non-QM loans are underwritten outside the conventional parameters of Fannie Mae, Freddie Mac or government-backed loan programs. Though not all non-QM loans land in rated securitizations, impairment rates reflect the portion of non-QM loans that are delinquent or otherwise under modification within a securitized loan pool.

Initial projections released this week by dv01, a data analytics platform owned by Fitch Solutions, show the overall non-QM loan impairment rate rose to 7.3% in April, a reversal of the 28-basis-point decline to 6.92% seen in March.

“When rates are that volatile, it’s hard to know exactly where to price a loan,” says Wise, noting that bids from end investors often change daily under current market conditions.

“I think it’s a war story. I think it’s an oil story. I think it’s a gas prices story,” Wise adds. “Whenever there’s positive news of the war you see rates drop.”

Dropping rates may be good news for borrowers, especially for first-time homebuyers making up a disproportionate share of active purchase demand this spring, as entrenched mortgage rate lock-in effects continue to sideline would-be repeat buyers.

But seesawing yields on U.S. Treasury bonds are forcing markets to trade on headlines and inflation fears. That’s quietly wreaking havoc on non-QM capital markets, experts say.

Meanwhile, as Wall Street firms waffle over what loans to fund or guidelines to adjust, the typical “flight to safety” in mortgage bonds has not materialized as it may have during previous periods of extreme uncertainty, says Will Fisher, who joined non-QM wholesaler Greenbox Loans as chief production officer in March.

“Wall Street guys get an allocation to buy a certain amount of loans and they have to deploy that capital, but they also can’t be flippant and they have to model it out,” says Fisher, formerly the director of sales for Dominion Wholesale Financial’s broker channel. “I think they don’t know what to do with their models.”

As scrutiny of the sector intensifies amid lackluster loan performance and macroeconomic pressures, newer entrants to the non-QM market are confronting more restrictions on warehouse lines of credit extended by depositories or other liquidity partners. They’re also facing larger haircuts on credit lines and worse advance rates, forcing those lenders to tie up operating cash for longer.

That puts lenders who may have launched non-QM channels to sustain their low-production conventional and government channels in a position of expending additional resources to secure market share.

‘Persnickety’ investors

Scotsman Guide has learned anecdotally that frustrations with Wall Street firms that buy large shares of non-QM loans prompted executives from some leading West Coast non-QM shops to skip the Mortgage Bankers Association’s signature capital markets conference held in Manhattan in mid-May.

“Investors are getting persnickety about what they’re buying,” says Fisher. But he adds that “we’re still seeing an appetite” for alternative-documentation and low-doc products that have seen sharply worse performance than their fully documented and investor-purpose counterparts.

“We’re not seeing product being taken off the table,” Fisher observes.

Dmitri Batsev, managing director of Imperial Fund Asset Management, a liquidity partner of AD Mortgage, tells Scotsman Guide that rising competition in the sector as non-QM market share has expanded is also driving tighter execution for some firms.

“The bid for loans remains strong but it can also evaporate in a nanosecond,” notes Batsev, who helped AD Mortgage bring two securitizations to market since the start of the Iran war in late February. He describes demand from bond buyers across the capital stack as at “near record levels,” an indication of resilient investor demand despite volatility.

“Investor and borrower acceptance for non-QM loans has grown,” he says. “New entrants need to think about diversifying existing options for their production.”