Fitch Says Weaker Collateral for Non-QM/Non-Prime 2023 RMBS Leads to Elevated Delinquency Rate

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Fitch Ratings, New York, said delinquencies for non-QM 2023-vintage RMBS transactions are higher than the 2022 vintage, reflection weaker collateral attributes.

Fitch cited weaker collateral attributes such as lower FICO scores, higher combined loan-to-value ratios, fewer full-documentation-type loans, higher mortgage rates and higher debt-to-income ratios.

The ratings agency accounted for weaker mortgage pools by modelling higher probabilities of default, resulting in an upward adjustment to expected pool losses. “Non-QM deals were issued with higher credit enhancement in the form of subordination given reduced excess spread and higher expected losses,” Fitch said in a special report, Weaker Collateral for Non-QM/Non-Prime 2023 RMBS Vintage Leads to Elevated Delinquency Rate (Credit Enhancement Commensurate with Fitch’s Increased Loss Expectations). “We do not expect any ratings changes.”

Fitch noted RMBS issuances included weaker collateral as mortgage and securitization markets became more challenging in 2022 and 2023 due to higher interest rates, declining volume and wider spreads. “Many collateral attributes were at their weakest between 2Q22 and 4Q22 when loans that were securitized in 2023 RMBS pools were originated, driving elevated delinquency rates for the 2023 vintage,” the report said. “For example, weighted average FICO scores decreased to 732 in 3Q22 from 742 in 3Q21, with loan concentrations shifting to lower FICO buckets with higher delinquency rates. The average delinquency rate for a non-QM 2023 vintage transaction four months after issuance is 3.2%, almost twice as high as the 2022 vintage.”

Fitch said it modeled probabilities of default at issuance for 2023-vintage transactions increased by nearly 200 basis points in the base case compared to the 2022 non-QM vintage RMBS to account for weaker collateral. The firm’s base case probabilities of default at issuance was 25.4% for loans currently delinquent and 16.2% for loans without a delinquency, indicating Fitch accurately identified the loans most likely to go delinquent early.