U.S. RMBS: Q3 2023 Non-QM RMBS Performance Update— Delinquencies Continue to Edge Up, but Credit Performance Holds

For Q3 2023, the U.S. non-Qualified Mortgage (non-QM) residential mortgage-backed securities (RMBS) sector saw credit performance hold largely within normal expected ranges as deal tests continued to pass and pool losses stayed modest. However, collateral pool delinquencies continued to incrementally rise sectorwide, maintaining the recent rising trend that started following last summer’s post-pandemic onset lows. In the latest October investor statements, these third-quarter themes look to be continuing early into the fourth quarter.

Drivers of the latest third-quarter performance trends included resilient macroeconomic data, with unemployment for September at 3.8% (just slightly higher versus the prior quarter, but still at historically low levels); robust consumer consumption activity; and economic growth, with the latest advance estimate of Q3 2023 GDP at a relatively brisk 4.9%, well above forecasts. On the housing front, home sales persisted at much lower levels versus last year, with higher mortgage rates suppressing purchase and refinance activity by the end of summer. Despite suppressed industry volumes, home prices on a national average basis kept rising; the Federal Housing Finance Agency purchase-only home price index was up about 5% for 2023 through August. This has kept default frequency in check and lessened liquidation/severity outcomes, even for only slightly seasoned collateral, but especially for well-seasoned mortgages.