AD Mortgage successfully closed its fourth non-agency securitization of the year coinciding with May's Mortgage Bankers Association Secondary and Capital Markets Conference and investor appetite was strong.
Jared Neale, portfolio manager of RMBS for AD Mortgage, noted that the "AAA"-rated tranche (the highest-quality, lowest-risk slice of the bond pool) was two times oversubscribed, with even stronger demand further down the credit stack.
The deal launched with a yield spread in the 140 basis point range over benchmarks on the AAA tranche, ultimately tightening to 135 basis points by issuance. This margin compression is a definitive signal of robust institutional support for residential mortgage-backed securities.
While recent data has
Why investors (and insurers) are flocking to non-agency bonds
Ever since
"The performance has been fantastic," Neale said. "Delinquency rates on average are about 5% to 6% and severities on that are essentially nothing. In terms of losses, there's really not much to report—just a few basis points."
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According to a Bank of America Securities report, insurers purchased $19 billion in RMBS bonds and $13 billion in residential whole loans in Q1 alone.
The vast majority of those insurer RMBS buys, 70%, were AAA-rated, with 95% holding investment grade ratings. By product type, $7 billion was non-qualified mortgages and $5.5 billion Jumbo 2.0.
"In terms of non-AAA purchases, we mostly see those within the Non-QM, HELOC/Home Equity, RPL, and
This massive deployment of capital is fueled by the insurance sector raising roughly $100 billion in annuities every single quarter. To put that in perspective, total fixed-income bond fund flows across the entire market for 2025 were $485 billion, meaning annuity growth alone mirrors nearly the entire broader bond market's inflows.
The flip side: examining rising impairments
Despite institutional enthusiasm, credit performance is worth watching. A recent report from dv01 (a Fitch Ratings company) revealed that non-QM performance weakened slightly in April.
- The core metric: 30-day-plus impairments rose by 22 basis points in April, marking the fifth increase in the past six months. March was the outlier, with a revised 39 basis point decline (original estimates were for 26 basis points); still so far in 2026, impairments are up 30 basis points.
- Vintage vulnerability: The credit stress is heavily concentrated in the 2023 and 2024 vintages. These loans were originated during a period of peak interest rates, higher debt-to-income ratios, and a greater concentration of purchase transactions.
Cash-out refinance mortgages also performed weaker than the normal case. However, deals from those pre-2024 vintages are likely to have been called by now and many of the problem loans are not included in the re-securitizations and instead included in non-performing or re-performing deals. - The documentation factor: The rise in impairments is predominantly centered around bank statement loans and self-employed borrowers. "What I would say, generally speaking, is even within these vintages, certainly the lower document types are not going to perform well," Vadim Verkhoglyad, head of research at dv01, said.
Delinquency breakdown by sector (90+ Days Late)
- Prime Jumbo: 0.42% (
+8 bps YoY ) - non-Prime / non-QM: 2.73% (+2 bps YoY)
- Closed-end seconds: 0.48% (+21 bps YoY)
- HELOCs: 0.73% (
+25 bps YoY )
Conversely, Verkhoglyad noted that early data for the 2025 vintage looks much healthier. Because interest rates eased slightly last year, these pools contain more rate-and-term refinances. These represent seasoned, financially stable borrowers who are lower risk. The cash-out borrower in 2025 is also likely to have benefitted from the lower mortgage rate environment, so even with their economic stress which led them to tap equity, they are able to stay flat or even save money on their payments.
DSCR guardrails: The new reality at the underwriting desk
This shifting macroeconomic backdrop has directly influenced how non-agency wholesale lenders are structuring Debt Service Coverage Ratio loans for real estate investors.
Before the pandemic, lenders routinely accepted DSCR ratios as low as 0.65 to 0.75 (meaning the property's rental income only covered 65% to 75% of the mortgage payment). Today, those metrics are a bygone era.
"Today, DSCRs at these levels are considered higher risk," said Megan Castleton, Chief Credit Officer at Constructive Capital. "Anything below a 1.0 times ratio often requires offsetting factors such as greater liquidity, additional documentation, or lowered leverage."
Lenders have adjusted how they structure these loans, including the use of interest-only products, with expectations the property's cash-flow will improve over time.
Market data for these IO mortgages shows these transactions typically refinance within three-to-five years on more attractive, stable terms, Castleton noted.
In the non-agency market, each lender does not necessarily consider the same factors a competitor who makes a similar loan might.
Most DSCR lenders start with standard metrics in addition to the debt service coverage ratio like the LTV and the credit score, Castleton said. The underwriting decision might also depend on the comfort with the asset type, market or deal structure. Some originators then look at the broader picture.
"For instance, a low DSCR ratio might be acceptable when there are offsetting strengths such as the borrower's credit profile, liquidity and experience managing rental properties," Castleton said. "Structuring cross collateralized loans or blanket loans may also provide some opportunities to offset risk and cost of asset management and origination."
