The non-qualified mortgage (NQM) market has grown significantly since the first securitization nearly a decade ago. NQM loans are those that do not meet the qualified mortgage (QM) requirements established by the Consumer Financial Protection Bureau (CFPB). NQM securitizations typically include loans with credit impairments, alternative income documentation, business-purpose or property-focused underwriting, or foreign national borrowers. While these are the typical NQM credit profiles, the regulation specifies certain reasons a loan would be considered NQM, which are described below.
The NQM market has generally performed well, with historical losses below 5 basis points (bps) across the securitized NQM universe. However, as the mortgage rate environment in recent years has suppressed prepayment activity, and cost-of-living pressures have weighed on consumers, NQM delinquency and defaults have been trending higher. Although it may be premature to call this an inflection point, there…