Non qm loans 2021 rates8/3/2023 The downside of the paydowns is that deals are being priced fairly quickly, Mui said. Wages are generally not keeping up with inflation, however, making inflation a secondary driver of prepayments. “If you have a fixed-rate debt obligation (which borrowers do when they take out a 30-year- mortgage), there’s an argument to be made that, assuming all prices go up (including wages), a borrower’s debt is decreasing over time in real terms,” Schopflocher said. It is not clear how the CPI step up would directly impact the non-QM market, according to Tom Schopflocher, a senior director at S&P Global Ratings. In April, there was a 5% year-over-year increase in CPI, the highest since 2008. has recently experienced the highest level of inflation seen for quite a while. He explained that after the financial sector started its recovery from the Financial Crisis of 2008, back offices automated much of the lending and underwriting processes, which increased the fluidity or speed in refinancings as well. “To the extent that there are borrowers who are looking at the possibility of higher inflation and, at the same time, their loans are “in the money” or have intrinsic value, this is going to lead to higher prepays," Mui said. The anticipation of potential inflation and the expectation that inflation would lead to higher rates are driving the refinancings. While the credit markets await Federal Reserve action on interest rates, borrowers are preempting central bank action in their bids to refinance. So the weaker performing loans may be called out and put into a warehouse line as opposed to going into securitizations,” Mui said. When these deals are called and they pool loans from new deals, they pull out the cleaner loans for the new deals also. “The seasoned loan component in the non-agency RMBS has been reasonably healthy and the re-performing sector has been fairly healthy as well. Loans that experienced delinquencies, foreclosures, or forbearances may not be part of the re-securitization subsequent to the call, but become a part of another transaction instead, like a re-performing or non-performing loan transaction.įrom the investors’ point of view, there has been an appetite for non-QM deals with the refinanced deal ending up being of higher credit quality. It is also an opportunity to cleanse the pool, which is what a lot of issuers do, Saha noted. Refinancing outstanding securitized debt is more than just about saving debt servicing costs. Others might have been happier that the deals paid off and they got back their principal, Saha explained. Some bondholders might have preferred the older transactions with relatively high coupons to continue on rather than having to re-deploy cash proceeds in the current market. Whether the prior bondholders could benefit when these post-call deals is still an open question. “It also gives an indication that there is a market for these newly issued bonds, which are backed by this called collateral.” “There’s an economic incentive there for issuers,” Saha said. Issuers can now place notes at lower interest rates backed by the same collateral, so they can lower their obligations to bondholders without having to assemble higher quality collateral pools. Bonds from the 2018 vintages were issued with higher interest rates, in turn. “Many of these transactions that we are seeing being called are from 2018 or earlier,” he said, when interest rates were higher. Most redeemed deals from June 2020 were within three months of their call dates, according to Deutsche. Most non-QM deals are eligible to be called at the earlier of three years from the closing date or when the pool has paid down 70%, said Sujoy Saha, a director at S&P Global Ratings RMBS team. Analysts agree that low interest rates are rendering non-QM deals eligible for calls, and driving activity in the non-QM space in recent weeks.
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