Moody’s: Weaker Non-QM Underwriting Increases Default Risk

Feb 20, 2020

Investors are facing a new threat of default risk in residential mortgage-backed securities (RMBS) due to weaker underwriting in non-QM mortgages, according to a new study from Moody's Investors Service.

The study noted that the current securitizations of non-QM loans were originated under a variety of underwriting programs and criteria, ranging from so-called non-QM “near misses” to reduced documentation mortgages to investor loans. Moody’s study noted that “while the performance history for these loans is limited, weaker non-QM underwriting variations add risk layers for RMBS.”

Moody’s also acknowledged the growing viability of non-QM: Issuance of non-prime transactions expanded from three deals in 2016 with a total balance of about $570 million to 57 deals in 2019 with a balance of approximately $23 billion. However, the study also pointed out that bank statement underwriting standards, which are used primarily for self-employed borrowers, could be problematic in terms of the quality of underwriting.

"Bank statement underwriting standards vary across originators along several dimensions, such as the number of bank statements used, the source of the statements, and how revenue and expenses are identified," says Moody's Vice President Lima Ekram.

However, Moody’s added that this problem is hardly insurmountable.

"Employing relatively stronger lending operational controls in the non-prime sector is likely to mitigate some risk from non-QM," said Ekram. "The use of technology in risk modeling and oversight can mitigate the risk of higher loan defaults from alternative documentation programs."

About the author

Phil Hall

Link copied

Published

Feb 20, 2020

Tech

Originators Rank Marketing As Their Biggest Tech Bottleneck

Four OriginatorTech demonstrations showed how vendors are applying AI and automation to content, database outreach, and loan operations

Mortgage technology companies spend plenty of time talking about faster files and smoother closings. But originators attending National Mortgage Professional’s latest OriginatorTech Demo Day pointed to a more immediate problem: marketing.Content creation and marketing topped...

Non-QM

GenWay Brings AI Automation To Non-QM Underwriting

The wholesale and correspondent lender plans to move six underwriting automation products into production within three months

GenWay Home Mortgage has deployed Tavant’s TOUCHLESS mortgage automation platform across its Non-QM and government-lending businesses, extending the industry’s push to automate underwriting beyond conventional agency loans.The national wholesale and correspondent lender is u...

Nov

Houston, TX

More from

Industry News

Fed Hike Raises HELOC Costs While Mortgage Rates Stay Near 7%

Prime rose to 7% while the 10-year Treasury remained near 5%, giving originators two different borrower conversations

Industry News

Sep 17, 2026

Rocket Raises Conforming Loan Limit To $845K Ahead Of FHFA

The higher limit gives brokers more room to keep borrowers from crossing into jumbo territory

Industry News

Sep 10, 2026

Rocket Pro Launches ‘Moving Squad’ To Recruit Brokers From UWM

Rocket is offering partners up to $10,000 to help bring UWM brokers onto its platform

Industry News

Sep 01, 2026

NEXA, UMortgage Leaders Explain What Drove Acquisition

Kortas relinquishes the CEO title, elevating Casa to co-equal "executive partner"

Industry News

Aug 31, 2026

Warsh Sees Housing Strain, Keeps Rate Hikes In Play

Fed chair says broader financial conditions remain loose, inflation is too high, and markets should expect less guidance on what comes next

Industry News

Aug 31, 2026

July CPI Eases Mortgage-Rate Risk, But Doesn’t Promise Relief

Consumer inflation rose just 0.1% in July, reducing pressure for a September Fed rate hike as mortgage rates remain near their highest levels of the year

Industry News

Aug 13, 2026

Popular