Moody’s expects RMBS performance to remain solid through 2026

Moody’s data shows that higher leverage loans – jumbo and conventional mortgages with debt-to-income ratios of 43.1% or higher – now account for almost 40% of new origination, up from around 20% in 2021.

When assessing risk, RMBS investors closely monitor the number of delinquencies – which are expected to rise due to a weaker labor market – and the trend of prepayments.

Amid falling interest rates and renewed refinancing opportunities, total prepayments are expected to “increase modestly,” the analysts said.

Recent vintages are more sensitive to even modest declines in interest rates, while seasoned vintage bonds – where most outstanding loans have coupon rates below 5% – are expected to remain slow to prepay, she added.

Moody’s expects national home prices to remain “flat to slightly down” in the coming years, following the post-2019 price boom that left many homeowners with significant equity. That equity buffer limits the risk for pre-2022 RMBS.

“Low equity in newer loans is particularly concentrated in certain GSE and government-insured mortgages, with small shares above 80% LTVs in prime RMBS,” the analysts said.

The analysts also expect mortgage rates to hover around current levels or slightly below in the short term.

Privatization talks, new credit scores

Regarding government-sponsored corporate credit risk transfer (CRT) agreements, Moody’s says collateral quality and transaction structures remain strong.

Borrowers’ credit scores remain high Fannie MaeThe number of loans purchased in the first quarter of 2025 averaged 762, compared to a long-term average of 752 from 1999.

But Moody’s warned that a potential GSE privatization could weaken the credit quality of some CRT tranches by reducing the strength of interest rate backstops and changing deal structures.

“In the meantime, the planned introduction of the use of VantageScores and new FICOs may also impact collateral quality as such usage has not been tested,” the analysts said.

According to them, there is only limited historical data available for comparison, especially from the period of the global financial crisis. The ability to choose between scores could also increase the risk that lenders will selectively use the most favorable score to stimulate production.

Investors should also expect a higher share of adjustable-rate mortgages (ARMs) in new prime RMBS pools, increasing the risk of payment shocks.

However, Moody’s also noted that ARM underwriting standards today typically take into account future payment adjustments – a key credit-positive difference from practices prior to 2009. Similarly, the temporary rate buyback loans offered by homebuilders are “typically underwritten to full repayments.”

The non-QM space

Moody’s also noted signs of relaxing underwriting standards in the non-qualified mortgage (non-QM) industry, along with some deterioration in pool quality. In some transactions, the collateral includes second-lien loans, while in others the underwriting guidelines have been softened.

For example, some lenders now allow investors in DSCR (Debt Service Coverage Ratio) loans to use the full existing lease amounts of the property without a cap on the difference from market rents, increasing risk if market rents fall.

Other lenders have reduced or eliminated requirements for attracting large deposits used for DSCR reserve accounts, further weakening credit protections.