In this month’s blog, once again we are seeing an emergence of a new type of financial instrument, called the “Non-Qualified Mortgage” with the same high-risk characteristics as sub-prime mortgages. Here we go again!! What is most disconcerting is its growth and popularity.
What is this non-qualified mortgage? According to Bloomberg Reports, it is basically a loan granted to borrowers whose less than perfect credit backgrounds made them ineligible for conventional mortgages. These lenders have gathered more than $18 billion worth of these loans and made them into bonds which they then sold to investors. This amount represents a 44% increase from 2018. Known as non-QM bonds, there are now some recent indications of delinquency rates on these loans. Not surprisingly, it is around 3% to 5% while the delinquency rate of Fannie Maes is approximately 0.7%.
Why its popularity? As one would surmise, non-QM bonds have coupon rates greater than 5% whereas typical Fannie Mae mortgage bonds are selling around 3.5%. The “non-qualified” moniker refers to any mortgages that don’t meet rules from the Consumer Financial Protection Bureau that went into effect in 2014. While these bonds themselves have more safeguards for investors than the 2007-2008 bunch, it is still not great. For example, an average of 36% of principal would have to be lost before the top-rated slice took a hit. In the past, it would have been 6% according to Fitch Analytics.
Once again, investors beware!! Until next time…….