Residential Mortgage Credit: Market Update, April 2024

A solid March wrapped up a strong Q1 for Residential Credit generally and Non-QM specifically. The sector continues to mature with most originators offering the product and a broad buyer base across securitizers and insurance loan portfolios. Insurance portfolios continue to grow in market presence and are now buying over 50% of monthly production. Given the attractive yields, strong credit quality, favorable risk-based capital treatment and ability to finance with the FHLBs, we expect more insurance capital to come into the space throughout the year. While a handful of the largest insurance portfolios have large, dedicated teams for residential loans, most new entrants are partnering with existing residential loan managers (like us) and gaining access to the space without the need for additional headcount.  

Year to date activity has been robust, and our estimate for total Q1 origination is $12-15BN. We expect total 2024 origination to total $50-60BN, as increased originator capacity and widespread demand drive volume.     

Despite the growing appetite for loans by the insurance buyer base, Non-QM securitization remains active and is the largest sector of new issuance in RMBS with $10BN issued in Q1 (on the table below, note that a lot of 2024 issuance volume was originated in 2023). We would also highlight the growth of the prime second lien market (CES/HELOC in the table below). Given the record levels of US home equity, high quality prime second liens at low loan-to-values represent and attractive and scalable asset class. Investor participation in second lien loans has also been broad with securitizers, loan funds and insurance portfolios all active.

Price action has been strong to start the year. Loan spreads have tightened nearly 100bps and borrower coupons have come in 40bps despite higher UST rates. Non-QM AAAs have tightened to 125, a level not seen since late 2021, early 2022. Absent a broader macro shock, we expect levels to grind tighter from here. Yields are still attractive, credit quality is high, and demand remains strong from both insurance portfolios and securitizers.

Production continues to be both high quality and very consistent in attributes. Below is a high-level look at our Q1 production.  High single-digit yields for prime quality first liens with significant equity are attractive for many buyer types. Second lien production is also attractive, with double-digit coupons for prime borrowers at low attachment points.

1st Liens

2nd Liens

At Shelter Growth, our focus continues to be delivering clients a turn-key solution for residential loan investing. We have added insurance mandates and believe our in-place infrastructure and customizable solutions offer clients an efficient and attractive way to access residential loan investing.   

Best Regards,        
The Shelter Growth Team