Key takeaways:
- While agency-guaranteed mortgages make up the lion’s share of the U.S. mortgage market, the non-agency RMBS market is large and diverse, with over $1.7 trillion in outstanding securities.
- For a mortgage to be agency guaranteed, it must adhere to specific federal underwriting guidelines. Mortgages that meet these guidelines are termed qualified mortgages (QM). Loans that do not meet these criteria are referred to as non-QM loans and form part of the non-agency RMBS market. Because the parameters for QM loans are relatively narrow, loans may be classified as non-QM for a wide array of reasons.
- The non-agency market is broad and diversified, serving as a catchall for residential credit that is not agency guaranteed. Because non-agency RMBS is not comprised of homogenous assets, we believe investing in the sector requires an active, research-driven approach.
Mortgage-backed securities are collections of residential mortgages with similar characteristics that are packaged together, or securitized, and sold to investors. The cash flows (principal and interest payments) from the underlying mortgage loans are passed through to investors.
In contrast to agency mortgage-backed securities (MBS), non-agency residential mortgage-backed securities (RMBS) are created by private entities and do not carry a government guarantee. Non-agency RMBS are typically comprised of residential mortgages that do not meet the criteria to qualify as conforming (or agency) loans
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Non-agency mortgage-backed securities are backed by loans that often have less favorable collateral, credit, or underwriting characteristics than those issued by government or government-sponsored entities. These may include “subprime” loans, made to borrowers with lower credit ratings or limited credit histories, who are more likely to default. Securities backed by such loans may be more sensitive to housing market conditions and may experience greater volatility and risk of nonpayment, particularly during periods of economic stress.
