According to Standard & Poors Global  (S&P), the non-qualified mortgage (QM) product has gained significant popularity in the four years since it was introduced, particularly in the past year, with securitization picking up substantially. The non-QM market is the fastest-growing segment of non-agency residential mortgage-backed securities  in the U.S., despite still being a relatively 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 compared to other RMBS categories, non-QMs have prepaid quicker, often soon after loan origination. The report found a conditional prepayment rate (CPR) 35 percent.
“This is much faster than non-agency prime jumbo prepayment speeds, which have been in the range of 5 percent–15 percent CPR,” said S&P in a release.
“What is most interesting about the non-QM behavior is that, unlike prime borrowers, options for non-QM borrowers are more limited,” the release continued. “So what is causing non-QM borrowers to prepay at such high speeds so soon after their mortgages close?”
The S&P investigation focused primarily on loans in deals S&P rated that prepaid within one year of origination—those 10 non-QM deals closed on or before January 2018. According to the report, the dominant driver of prepayments is income documentation. Borrower occupancy (specifically, whether or not a loan was for an investor property) and the duration of income verification also play important roles. The loan interest rate and the borrower FICO score had less impact on prepayments; however, they contributed to the overall fit of the model.
The full report, "Is It Life in the Fast Lane, or Will They Start to Take It Easy?"  was published on Sept. 21, 2018, on RatingsDirect .