Morgan Stanley's latest non-prime residential mortgage-backed securities (RMBS) will raise $397.5 million through the Morgan Stanley Residential Mortgage Loan Trust, 2026-NQM1.

With a closing date scheduled for January 29, the transaction will issue the debt through a mixed, pro-rata and sequential structure of about 11 tranches of class A, M and B notes, according to Kroll Bond Rating Agency.

Senior notes will repay investors on a pro rata basis, while the mezzanine and subordinate classes will follow a sequential structure, KBRA said. All the notes, which are fixed, are slated to mature in December 2070.

Various lenders, which includes many small and unrated entities, originated the 832 underlying loans in the collateral pool, and underwrote them using non-traditional income verification, KBRA said. The non-traditional underwriting was applied to 79.0% of the loans in the pool, the rating agency said.

Morgan Stanley Mortgage Capital Holdings aggregated the loans, however, and sold them to the pool. Also, all the loans also underwent third-party due diligence reviews, KBRA said.

All the loans are first lien and primarily (78.6%) finance single-family homes and planned unit developments. Condominiums and two- to four-unit multifamily properties. On average, they have an average balance of $477,834, KBRA said.

On a weighted average (WA) basis, the loans have a term of 362 months, and a coupon of 7.21%. Just 9.9% of the loans in the pool have an interest-only period. Borrowers have a FICO credit score of 747, and an original loan-to-value ratio of 71.5%.

That moderate leverage reflects the quality of RMBS pools from recent issuance years. Borrowers have a non-zero WA annual income of $1 million, with liquid reserves of $594,348.

The pool has a debt service coverage ratio of 1.21%, KBRA said.

KBRA assigns AAA to all the A1 tranches; AA to the A2 notes; A- to the A3 notes; BBB to the M1; BB+ to B1; and B+ to the B2 notes.