Hard to believe we are in March already. It’s been a solid start to the year for Non-QM; securitization issuance remains healthy and insurance company demand for loans is very strong. On the back of this demand, credit spreads have tightened sharply YTD. We think the market is likely to be rangebound for the time being. Given the sharp rally to start the year, we don’t expect much further tightening, but the positive supply / demand technicals are likely to prevent a substantial widening.
Across our book and talking to others across the industry, Non-QM mortgage origination volumes picked up nicely in February. There isn’t a great source of exact numbers, but we’d put YTD origination in the $7.0-8.5BN zone. For the full year, the consensus forecast is $50-60BN. Production remains very high quality and consistent in attributes. YTD averages for our production are: 8.55% coupon, 740 FICO and 71 LTV. The Non-QM market focuses on borrower segments not well served by the GSEs and bank portfolios and our production reflects this with 50% self-employed borrowers and 33% investor properties. Coupons have come down as spreads have tightened and have been closer to low 8% recently, but still highly attractive in our view.
We attended last week’s structured products conference in Las Vegas, where I think the tone was best described as cautious optimism. This annual get-together covers most everything in structured products except for CMBS and is attended by bond buyers, issuers, originators, dealers, and service providers. It’s interesting how much of a focus Non-QM has become. Non-QM now represents the highest annual issuance sector in RMBS, the most liquid secondary market in RMBS, the most actively traded loan market and definitely where the marginal dollar of insurance capital is flowing into residential credit. Still a lot of room to grow, but pretty good progress.
We spoke with participants on all sides of the market, and despite the spread tightening in Non-QM, risk-adjusted return remains attractive and investors have money to put to work. Across both loans and securities, the investor base is broad and growing with insurance companies, debt funds, REITs, broker dealers and pensions participating.
We’ve mentioned a few times how much the market has moved, so let’s dive into some details. On the securitization side, the top of the capital stack has been range-bound, but subordinate tranches have tightened significantly. We generally do not see AAAs trading inside of Agency MBS so I suspect it will be hard to tighten materially absent a move in TBAs. The rally in subs is consistent with a strong bid for yield across structured products and, while we may run some more, it won’t be at the same pace. For some further context, this time last year we bought BBBs and BBs at 475 and 675 respectively (see table below).
Whole loan spreads have benefitted from both the move in securities and sizeable insurance portfolio demand. On the insurance side, existing players have sizeable buy programs for 2024 and new entrants are coming to market regularly. In total, we estimate insurance portfolios are buying at least half of monthly origination. So, while we suspect the tightening will take a bit of a pause here, the supply demand technical likely doesn’t allow for much widening.
| Asset | Feb-24 | Dec-23 | Move |
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| Non-QM AAA | 145 | 155 | -10 |
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| Non-QM BBB | 245 | 320 | -75 |
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| Non-QM BB | 350 | 450 | -100 |
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| Whole Loan | 295 | 365 | -70 |
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On our end, our focus is delivering clients a turn-key solution for residential loan investing. We continue to expand the opportunity set with existing clients and have meaningful dialogue with potential new relationships. Meaningful new capital is flowing into the sector, particularly from insurance portfolios, given the attractive risk/return of loans, the favorable RBC treatment, the availability of FHLB financing, and the focus on FHLB mission alignment. We offer customizable solutions and can work with investors in a variety of ways. Please reach out to learn more or just to talk about what we’re seeing in the markets.
Best regards,
The Shelter Growth Team
