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

Analysis and Data

Mortgage Rates Edge Down To 7.32%, Offering Limited Pipeline Relief

The modest decline trims borrower payments, while year-end forecasts above 7% leave LOs focused on deals already close to working

The first mortgage-rate decline in two months trims about $22 from the monthly payment on a $400,000 loan. For LOs trying to salvage year-end transactions, that creates an opening among borrowers already close to making the numbers work.Freddie Mac reported Thursday that the...

Operations

LO Compensation: What The Split Doesn’t Tell You

NMP’s Ignite summit explored the rules, expenses, and platform differences that shape what originators actually earn

A loan officer willing to earn less to win a borrower can still run into a compensation problem. The sticking point is how that smaller paycheck is determined, who funds it, and whether the arrangement connects compensation to the loan’s terms.That tension drove National Mor...

Feb

Palm Springs, CA

More from

Industry News

Zippy Adds Capital For Manufactured-Home Lending Push

The $20 million investment from Saluda Grade will support expansion beyond 27 states and new loan products across wholesale, retail, and community channels

Industry News

Oct 16, 2026

Inflation Hits 3.7%, Putting Mortgage Rate Relief At Risk

September’s inflation pickup puts recent rate improvements at risk, potentially eroding affordability gains from lower home prices and seller concessions

Industry News

Oct 14, 2026

PLACE Acquires Ardley, Expanding Push To Turn Existing Borrowers Into New Loans

The latest deal connects borrower retention technology with Maxwell's origination platform and PLACE's real estate network, creating new opportunities for lenders

Industry News

Oct 09, 2026

Equifax, TransUnion Launch New Tools To Cut Credit Report Costs

Both bureaus introduce ways to purchase credit scores separately from reports, while Equifax reports growing VantageScore adoption and extends $1 pricing through 2028

Industry News

Oct 09, 2026

Newrez, eXp Realty Form Joint Venture To Target Purchase Business

Revenos Mortgage is set to launch in early 2027, replacing eXp's joint venture with Kind Lending

Industry News

Oct 08, 2026