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U.S. RMBS: Steady Curtailments Boost Rising Payment Velocity in Non-QM RMBS, a Credit Positive

Rising payment velocity—the ratio of payments made by borrowers in DBRS Morningstar-rated residential mortgage-backed securities (RMBS) backed by non-Qualified Mortgage (non-QM) loans to the scheduled payments—is a credit positive because there is more cash available to pay bondholders. Payment velocity has been increasing since a drop in mid-2020 and is mainly due to a growing number of mortgagors who previously missed one or more scheduled payments are now making the payments on time. Some of them have either fully caught up or are in the process of catching up on the previously missed payments, further bolstering the payment velocity. A significant share of the non-QM borrowers makes additional payments to reduce the principal amount of loans (curtailments), helping boost the payment velocity by increasing cash collections and offsetting missed payments which is yet another credit positive for non-QM RMBS.

Barring an unexpected recession or a sharp drop in home prices, DBRS Morningstar expects the payment velocity in non-QM RMBS to remain robust through 2021 and early 2022 as delinquency rates continue to fall. Also, we expect non-QM borrowers to continue paying the curtailment amounts at a healthy pace as the borrowers’ incomes recover after the Coronavirus Disease (COVID-19)-induced economic downturn, and more funds may be available to make extra principal payments.