U.S. RMBS: Q1 2025 Non-QM Recap--Brisk Supply as DQs Edged Up, CPRs Down, and Structural Integrity Holds Across Sector Deals

The U.S. non-Qualified Mortgage (non-QM) residential mortgage-backed securities (RMBS) sector was very dynamic in the first quarter of 2025 with brisk issuance volumes amid resilient credit and deal performance. Aggregated collateral pool delinquencies continued to rise incrementally through Q1 2025, with 60+ levels at 3.78% at quarter end, about +27 basis points (bps) quarter over quarter (QOQ) and +93 bps year over year (YOY). Meanwhile, cohort prepayments backed off -1.5 points from Q4 2024 levels to a 10.93 conditional prepayment rate (CPR), but still faster YOY by 3.5 CPR, as driving conventional mortgage rates have continued to hover in the mid-6% to 7% area, with non-QM rates generally in the mid/high-7% range. Meanwhile, structural performance for nearly all deals in the non-QM sector remained thoroughly adequate as cumulative net losses across outstanding deals remained very minimal (less than or equal to a max 55 bps sectorwide), allowing credit enhancement (CE) levels to keep improving modestly. For Q1 2025, transaction closing volumes finished slightly above Q4 2024's average pace, totaling in excess of $11.6 billion in collateral securitized, versus about $11.1 billion in the Q4 of last year, with deal collateral attribute variability holding largely in context within each respective issuance platform's recent trends.

The primary influences for the latest quarter's non-QM credit performance included some slight shifts, alongside some steadiness, in the macroeconomic environment. The unemployment rate from Q4 2024 through Q1 2025 ticked up to 4.2% from 4.1%, a tenth of a percentage point above the end of Q3 2024 and tied for the highest level since 2021. Meanwhile, nonfarm payrolls continued to add just a moderate number of jobs to the economy, a trend that has persisted over the past few quarters. The latest Q1 2025 GDP numbers (advance estimate) showed economic activity slipping slightly by -0.3%, the first decline since Q1 2022, as inflation grinded lower to 2.4% in March, according to headline CPI, stubbornly remaining above the Federal Reserve's general 2.0% target level.