Written by: Internal Analysis & Opinion Writers
Signs of stress in the non-qualified mortgage sector continued to surface toward the end of 2025, as an increase in loan impairments that emerged in November persisted into December. While overall non-QM performance remains far from crisis levels, industry analysts say the trend reflects a market that is adjusting to prolonged higher interest rates, tighter liquidity, and borrower payment sensitivity rather than one experiencing sudden deterioration.
Loan impairments, which capture loans showing elevated credit risk due to delinquency, modification, or other performance issues, rose modestly across several non-QM segments during the final two months of the year. Market participants emphasize that the increase follows an extended period of historically strong performance and should be viewed in the context of a maturing loan cohort rather than a systemic breakdown.
“This looks like normalization, not a collapse,” said one structured-finance analyst who tracks non-QM securitizations. “Loans originated in a higher-rate, higher-payment environment are naturally going to show more stress as borrowers adjust.”
The uptick has been most visible in non-QM loans originated during periods of peak interest rates, when monthly payments rose sharply compared with prior vintages. Borrowers who qualified under alternative income documentation or asset-based underwriting have faced higher carrying costs as insurance premiums, property taxes, and maintenance expenses increased alongside mortgage payments.
Despite the rise in impairments, delinquency levels remain relatively contained compared with pre-crisis benchmarks. Analysts note that most impaired loans continue to show meaningful borrower equity, which has limited loss severity and provided servicers with multiple resolution options. Home price appreciation over recent years has created a cushion that helps absorb payment disruptions without immediately translating into defaults.
“Equity is doing a lot of work right now,” said one non-QM portfolio manager. “It gives borrowers flexibility and gives servicers time to resolve issues.”
Servicing data suggests that many of the impaired loans involve borrowers experiencing short-term cash-flow disruptions rather than structural inability to pay. Payment shocks tied to adjustable-rate features resetting, insurance premium increases, or business income volatility have contributed to temporary distress in some cases. As a result, loan modifications and repayment plans have been more common than foreclosure actions.
The persistence of impairments into December indicates that the pressure is not isolated to a single reporting period. Instead, it reflects a broader environment in which higher borrowing costs have become embedded in household budgets. Unlike earlier phases of rate volatility, borrowers can no longer assume that relief through rapid refinancing is imminent.
Non-QM issuers and servicers have responded by tightening loss-mitigation protocols and increasing borrower outreach. Early intervention strategies are being deployed to identify at-risk loans sooner, allowing servicers to work with borrowers before delinquencies deepen. Industry participants say this proactive approach has helped prevent a sharper deterioration in performance metrics.
“We learned a lot from previous cycles,” said one servicing executive. “The focus now is on engagement and resolution, not delay.”
From an investor perspective, the increase in impairments has reinforced a cautious but not alarmist stance. Bondholders are closely monitoring performance trends, but most report that credit enhancement levels remain adequate. Senior tranches of non-QM securitizations continue to perform as expected, supported by subordination and excess spread.
That said, investors are paying closer attention to loan-level characteristics, particularly debt-service coverage ratios, documentation types, and geographic concentration. Pools with layered risk features are facing greater scrutiny, while those with conservative structures continue to attract demand.
“Transparency matters more than ever,” said one fixed-income investor. “The market can handle stress if it understands where it’s coming from.”
The impairment trend also reflects the broader evolution of the non-QM market. As the sector has grown, it has diversified beyond niche borrower profiles into a wider range of income scenarios and property types. This expansion naturally brings a broader performance distribution, including more visible stress during periods of economic adjustment.
Issuers emphasize that underwriting standards remain materially stronger than in earlier non-QM cycles. Fully amortizing structures, meaningful down payments, and rigorous verification processes have limited speculative exposure. As a result, today’s impairment increases are occurring within a framework designed to absorb stress rather than amplify it.
Still, the persistence of impairments has influenced origination behavior. Lenders are continuing to favor simplicity and defensibility, with renewed emphasis on fully documented income, conservative expense assumptions, and borrower liquidity. Products that performed well through recent volatility are gaining favor, while more aggressive offerings remain sidelined.
Warehouse lenders have also taken note, reinforcing covenants and performance triggers tied to collateral quality. Access to funding remains available for established platforms with strong track records, but tolerance for deviation has narrowed. This environment is reinforcing discipline across the origination and securitization pipeline.
Macroeconomic conditions remain a key variable. While employment levels have held up, pockets of labor market softness and uneven income growth are contributing to borrower stress in certain regions. Small-business owners and self-employed borrowers, a core non-QM demographic, are particularly sensitive to revenue fluctuations.
At the same time, housing market stability has helped prevent a sharper rise in credit stress. Home prices have largely held their ground nationally, even as growth has slowed. That stability has limited negative equity scenarios, which historically have been a major driver of mortgage losses.
Analysts caution that the direction of impairments in early 2026 will depend on whether rates ease further and whether household costs stabilize. A gradual decline in rates could provide relief for borrowers with adjustable-rate features and improve refinancing options for some. Conversely, a prolonged period of elevated costs could keep impairment levels elevated.
“The next few quarters will be telling,” said one housing economist. “This is a test of whether the non-QM market can perform through a full higher-rate cycle.”
Importantly, industry participants stress that the current environment differs markedly from past periods of mortgage distress. Credit quality remains significantly stronger, leverage is lower, and regulatory oversight is more robust. The increase in impairments, while noteworthy, has not translated into widespread defaults or forced asset sales.
For servicers and issuers, the experience is reinforcing the importance of ongoing portfolio surveillance and stress testing. Scenario analysis that incorporates higher insurance costs, tax increases, and income volatility is becoming standard practice as firms prepare for a more uncertain economic backdrop.
Borrowers, too, are adjusting expectations. Many non-QM borrowers are prioritizing liquidity and payment stability, even at the cost of higher interest rates. This shift is influencing product demand and reinforcing the move toward simpler, more predictable loan structures.
As the non-QM market enters 2026, the persistence of impairments into December serves as a reminder that higher-rate environments come with tradeoffs. Growth remains possible, but it must be accompanied by vigilance and discipline.
“The market is doing what it’s supposed to do,” said one industry veteran. “It’s identifying stress early, absorbing it, and adjusting.”
While challenges remain, most analysts view the current impairment trend as manageable within the broader context of a maturing non-QM sector. If economic conditions stabilize and rates gradually ease, the market is expected to work through these pressures without significant disruption.
For now, the rise in impairments stands as a signal — not of crisis, but of transition — as non-QM lending continues to evolve in a landscape defined by higher costs, cautious capital, and renewed focus on long-term performance.
