The secondary market for loans
That's in part because both securitizers
"You've been getting back to this kind of interesting spot where it is a combination of the two," said Mack Walker, senior vice president of capital markets at Deephaven Mortgage.
The higher prices available for loans underwritten using alternative measures like bank statements and debt-service coverage ratios have been valuable to lenders at a time when the profitability has been under pressure, so their drivers are important to understand.
The non-QM market produces $100 billion in originations in a good year, and for insurance companies in the aggregate "that is a drop in the bucket," said Vadim Verkhoglyad, vice president and head of research at dv01, a Fitch Ratings subsidiary.
"It's barely noticeable, considering how much money these guys are managing. So if they step in, that's a huge amount of new demand," he said
Securitizers also have been active and influential, Verkhoglyad said.
"If you look at a lot of the big research-side forecasts for non-QM issuance in the market, 2024 has easily already eclipsed that mark for most issuers, and a lot of them have revised their guidance upward," he told NMN.
While the non-QM bid has been strong recently, it's worth noting that it has had its ups and downs over the last four years.
During the initial chaos around the 2020 pandemic, it and the whole private market for loans
Also worth noting, to keep things in perspective, is that while the non-QM bid has been very attractive recently, it hasn't gotten as high as it did a few years ago.
"I don't think anyone can replay peak 2021 for quite a while, but it's certainly strong," Verkhoglyad said.
The variation in the non-QM market over time raises questions about how long the sweet spot it's been in will last.
There is some potential for insurers' appetite for non-QM loans to shift slightly if rates fall as expected, but a major change is unlikely, an executive told analysts during Angel Oak Mortgage REIT's Aug. 6 earnings call. The real estate investment trust buys and securitizes non-QM.
"As the rates continue to go lower and the securitization bid gets stronger, I think that the insurance companies may be less competitive," said Sreeniwas Vikram Prabhu, co-founder, managing partner and group chief investment officer at Angel Oak Capital.
"We are optimistic the broader economic background will be generally supportive of our outlook," he added.
A strong bid persisted in the non-QM market at the time of this writing, according to Verkhoglyad.
"There's no clear reason right now on the horizon to see why it wouldn't continue, but things do change," he said.
To get a sense of what might cause the market to shift, consider that insurers primarily buy mortgage investments to match their liabilities. Anything that makes them uncertain could affect their appetite for non-QM or other loans.
"What they ideally want is for the loans to prepay exactly what they model," said Verkhoglyad.
How single-family mortgages compare to other competing investments insurers might consider could also drive them toward or away from non-QM.
While securitizers may focus more closely on particular assets, "with insurance-based money or insurance-based capital, they tend to spend more time looking at the relative value trade-off" Walker said.
A third factor that could change the market's appetite for non-QM would be a significant lapse in loan performance.
So far, while non-QM arrears have been see-sawed a bit in the short-term, long-term defaults have remained historically low, Verkhoglyad said.
There has been some variation in the performance of securitized loans from different issuers but no extremes within the range, he added. That suggests discipline in the industry underwriting standards is limiting delinquencies.
"Not a single non-QM deal has come even within a stone's throw of tripping its loss trigger," said Verkhoglyad.
