Beyond Agency: Where Non-QM, DSCR and Scratch & Dent Loans Are Finding Liquidity

[00:04] Matt Sexton: MPA Talk, the American Mortgage Professional Podcast. 

[00:11] Matt Sexton: Welcome to MPA Talk, where we bring industry leaders in to discuss topics that matter to mortgage brokers. 

[00:17] Matt Sexton: I'm Matt Sexton, mortgage journalist here at Mortgage Professional America, and today our topic is Beyond Agency, where non-QM, DSCR, and scratch and dent loans are finding liquidity. 

[00:27] Matt Sexton: To discuss this topic, I'm grateful to be joined on this edition by Dan DeMonte, Senior Sales Director, and Brian Dunn, Managing Director of Pricing and Analytics at Citus AMC. 

[00:36] Matt Sexton: Dan and Brian, thank you so much for joining us on this edition of MPA Talk. 

[00:40] Daniel DeMonte: Thank you for having us. 

[00:42] Brian Dunn: Yep. Thank you. 

[00:42] Matt Sexton: Let's dive right into the questions. And Brian, we'll start with you. 

[00:46] Matt Sexton: Which asset types are getting the most attention right now outside of the agency market? 

[00:51] Brian Dunn: Well, we've really seen significant growth in the volume of both non-QM and Second lien originations. 

[00:58] Brian Dunn: And this is really being driven by borrower demand for mortgages that are outside of either agency guidelines or just trying to access the equity in their homes. 

[01:08] Brian Dunn: You know, we really see continued growth in this sector. 

[01:11] Brian Dunn: As one barometer for that growth, we've seen securitization issuance increase pretty dramatically since 2025. 

[01:18] Brian Dunn: So, you know, just non-QM and DSCR issuance, I think, went from something like $62 billion in 2025, and it's, you know, upwards of $98 billion. 

[01:26] Brian Dunn: year-to-date. 

[01:27] Brian Dunn: And on the closed-end second side, it was about $22 billion in 2025 and, you know, increasing to, you know, probably about $35 billion year-to-date. 

[01:37] Brian Dunn: So, you know, both of those asset classes have performed pretty well. 

[01:41] Brian Dunn: We've seen some pretty good performance on the non-QM side specifically. 

[01:45] Brian Dunn: It has been relatively low delinquencies and low losses across the space. 

[01:50] Brian Dunn: I mean, certainly there's some tearing by things like documentation type, FICO, and LTV, but Overall, you know, delinquencies have been sort of, you know, low to, you know, mid-single digits, which has been pretty favorable. 

[02:02] Brian Dunn: On the spread side, we've certainly seen some widening in this space kind of coming out of September and continuing into October. 

[02:10] Brian Dunn: We've seen AAAs at a spread of about 160 basis points recently, and that's up from, you know, a level of about 130 to 135 that we saw at the beginning of September. 

[02:22] Brian Dunn: So, you know, certainly some volatility with the rising rates that we saw in September, but, you know, that's also created— we've seen some buying opportunities for loan pools below par as lower coupon loans have kind of worked through the pipeline. 

[02:35] Brian Dunn: You know, on the DSCR side, we've seen that to be pretty popular with insurance companies, just kind of given better convexity profile due to the embedded prepay penalties associated with that product. 

[02:47] Brian Dunn: And then, you know, with closed-end seconds specifically, we've seen investors kind of focus on loans where the The first lien has a relatively low coupon rate, and they are kind of looking at from an all-in kind of effective rate between the first and second as a way to help manage prepay risk associated with those loans. 

[03:06] Brian Dunn: You know, lastly, I'll mention, you know, RTL is also an asset class that we, you know, see receiving some attention. 

[03:12] Brian Dunn: And, you know, certainly there was a rated KeyAve deal a couple years ago that I think created some additional liquidity in that space. 

[03:18] Brian Dunn: And, you know, I would expect that to be, you know, an asset class that, you know, continues to grow, especially it's attractive in a Dan, 

[03:29] Matt Sexton: any thoughts about that? 

[03:30] Daniel DeMonte: Yeah, so everything as usual. Brian is very accurate in his view of the world. 

[03:35] Daniel DeMonte: He's got a wonderful background, as do all my colleagues at Citi's AMC. 

[03:41] Daniel DeMonte: I would just say a couple add-ins would be, you know, non-QM for sure has seen great growth. 

[03:47] Daniel DeMonte: I break that— it's a very generic term, and so I break that into 2 categories. 

[03:51] Daniel DeMonte: One is a true business purpose type loan, a DSCR type loan or a TL type loan. 

[03:56] Daniel DeMonte: And then you still have consumer lending in there, and that may be any type of loan that would be an ITIN or bank statement only type loan. 

[04:04] Daniel DeMonte: So as much as they're grouped together, they're 2 very different products, but do serve a purpose for mortgage clients. 

[04:13] Daniel DeMonte: I actually started my career in the origination side, and so I'm aware of making sure you have the proper bucketing of offerings to an individual, because you never know exactly what fits what they need at that point in their life. 

[04:25] Daniel DeMonte: In addition to that, Brian talked about second liens for sure. 

[04:29] Daniel DeMonte: We What we also do see as a derivative of these types of loans that have a more, a bigger box than agency loans is scratch-and-debt loans. 

[04:38] Daniel DeMonte: It's something that is very much part of the industry. It's not a bad thing. It's just a thing. 

[04:44] Daniel DeMonte: If you're going to provide this as a resource to the, to the lending community, you're going to see those. 

[04:51] Daniel DeMonte: You just want to understand what you have, understand why you ended up in that position. 

[04:56] Daniel DeMonte: And sooner is better. You don't want to wait. 

[05:00] Daniel DeMonte: You understand what you have, you understand what the issue is, and in fact, what fair market is. 

[05:05] Daniel DeMonte: Fortunately for us, we face the market, and that's probably about 400 clients with a very good indication whether we're valuing them like Brian does or we're trading them like myself and my colleagues do. 

[05:17] Daniel DeMonte: At the end of the day, investors have continued to grow in this space. 

[05:21] Daniel DeMonte: I think Brian mentioned insurance companies. 

[05:23] Daniel DeMonte: I will tell you that there are asset managers, Banks, broker-dealers, aggregators, REITs, all participating. 

[05:30] Daniel DeMonte: Some are enjoying the liquidity on a whole loan basis. 

[05:35] Daniel DeMonte: Some are aggregating for security, for securitization. 

[05:38] Daniel DeMonte: Sometimes it may be a balance sheet investment or even just general trading opportunities that allow for, I think, success in the non-agency business. 

[05:48] Matt Sexton: Well, I think what Dan said there kind of ties us into the next question. 

[05:51] Matt Sexton: We'll go back to Brian for this one. Where would you say buyer appetite is strongest right now? 

[05:57] Brian Dunn: Yeah, we've really seen insurance companies kind of driving the non-QM market, and they have for the past few years. 

[06:04] Brian Dunn: They obviously have a pretty low cost of capital. 

[06:06] Brian Dunn: They can use their balance sheet to house assets, and they've really been buying, you know, product that's pretty clean, kind of fits into their credit box. 

[06:16] Brian Dunn: All of that's really being driven by pretty high demand for annuities that they can sell to their customers. 

[06:21] Brian Dunn: So we've really seen insurance companies step in in a pretty big way. In the non-QM market. 

[06:26] Brian Dunn: We've seen maybe a little bit of pullback recently with insurance companies, you know, probably on pace to buy less than they did in 2025. 

[06:35] Brian Dunn: But sort of next up and kind of filling the void is, you know, aggregator issuers. 

[06:40] Brian Dunn: And those are, you know, managers that are buying pools of whole loans and then aggregating them and then selling into securitizations. 

[06:47] Brian Dunn: And generally, you know, over the past few years, securitization execution has been pretty favorable, you know, as there's been a very high demand for the bonds off of those deals. 

[06:56] Brian Dunn: And that has in turn, you know, really increase the demand for a loan product to feed into those securitizations. 

[07:02] Matt Sexton: Dan, any thoughts about that? 

[07:04] Daniel DeMonte: Yeah, again, Brian and I are very much aligned. 

[07:07] Daniel DeMonte: I think there's a lot of insurance money that is in the space and continues to have interest. 

[07:13] Daniel DeMonte: What they like here is the WACC, or weighted average coupon, and the duration that fills up their responsibilities and their matching their assets and their liabilities and their balance sheet as an insurance company. 

[07:26] Daniel DeMonte: So the mortgage community fits that exceedingly well for them. 

[07:30] Daniel DeMonte: The easier traded loans are going to be things that are cleaner or things that have less complexity in the loan. 

[07:38] Daniel DeMonte: So the more normal, the more average type collateral and credit they have, it's more attractive to the purchasers of these, whether it's a whole loan or a security. 

[07:51] Daniel DeMonte: At the end of the day, continues to be a large group of meaningful investors looking for this type of, this type of capital. 

[07:59] Daniel DeMonte: They are being disciplined, and that means being clear on what they're buying, being clear on what the risks are, because they can be a higher level of risk because you're getting a better return for that risk with non-agency loans, and making sure you're focused on things like credit and LTV and HPA and all the things that could move the value of that loan from what it is to maybe something 

[08:21] Matt Sexton: It's a really good look at the buy side of it. Let's take a look at the sell side of it. 

[08:25] Matt Sexton: We'll start with Brian again. What makes a loan easier or harder to sell in your opinion? 

[08:31] Brian Dunn: You know, I think certainly, you know, sometimes a weaker credit profile can kind of make loans, you know, harder to sell at times. 

[08:38] Brian Dunn: So, you know, like lower FICO score or higher LTV can make, you know, certainly it to be, you know, more challenging to sell into certain buyers. 

[08:48] Brian Dunn: You know, the other thing more recently is obviously rates have risen, you know, quite a bit. 

[08:52] Brian Dunn: So, you know, loan pools with lower coupons might be a little bit more challenging, obviously, to sell at the levels, you know, that we were seeing prior to, you know, let's say September. 

[09:01] Brian Dunn: You know, however, even though, you know, just because sellers might be a little bit reluctant to, you know, also sell at a loss. 

[09:08] Brian Dunn: But the other thing is sometimes, you know, buyers might, you know, view that as a little bit more favorably just because, you know, with a better convexity profile compared to say, you know, more of an at-the-money coupon rate. 

[09:18] Matt Sexton: Dan, what are your thoughts on that? 

[09:20] Daniel DeMonte: Yeah, I think again, similar, the higher the loan quality, better the documentation, collateral performance history. 

[09:27] Daniel DeMonte: Knowledge is power. Power is price, right? 

[09:29] Daniel DeMonte: That's what's going to end up where you sit in the marketplace. 

[09:33] Daniel DeMonte: It's going to define liquidity and the number of investors that have interest in those types of loans. 

[09:39] Daniel DeMonte: New production is, you know, obviously it's more recent. 

[09:42] Daniel DeMonte: You're talking about third-party reviews, which is actually part of the offering of the Sidus AMC Group. 

[09:47] Daniel DeMonte: We have the largest due diligence firm in the As you get into more seasoned loans, you can start to get into collateral issues or servicing concerns. 

[09:56] Daniel DeMonte: You may have some litigation exposure, documentation gaps, anything that would give you concern, not about the loan, about the information that's necessarily behind it. 

[10:08] Daniel DeMonte: There is liquidity. We've seen loans trade at 105 and at 30. 

[10:13] Daniel DeMonte: So as the old adage is, not a bad loan, it's the bad price. And we see that on a very daily basis. 

[10:18] Daniel DeMonte: to see where people have inherent desires and what they'd like to see and what it would like to do. 

[10:24] Daniel DeMonte: Again, the more, you know, more target-driven the industry is, the better you know what to expect and the better you expect to pay for that asset. 

[10:32] Matt Sexton: And getting into the pricing, let's dive a little farther into that. 

[10:35] Matt Sexton: Brian, what has the biggest effect on how a loan is priced? 

[10:41] Brian Dunn: Yeah. 

[10:41] Brian Dunn: So from an analytics viewpoint, we really focus on the future performance, you know, of, of the loans. 

[10:48] Brian Dunn: So we are very focused on forecasting out prepayment and default assumptions. 

[10:52] Brian Dunn: So the collateral characteristics of a loan are really going to matter to us when we are looking at the pricing or valuation of a loan. 

[10:59] Brian Dunn: So things like coupon, FICO, LTV are all extremely, you know, important for kind of forecasting out that future performance. 

[11:07] Brian Dunn: The other thing we look at pretty closely is just the market rate environment and how changes in interest rates are going to affect that. 

[11:13] Brian Dunn: future performance as well as spread levels. 

[11:16] Brian Dunn: We really spend a ton of time kind of assessing, you know, what are the spread levels in the market by looking at kind of a variety of sources, looking at a variety of market color. 

[11:25] Brian Dunn: So all these things will really, you know, influence the values that we're putting on loans. 

[11:30] Matt Sexton: Dan, any additional thoughts on that? 

[11:31] Daniel DeMonte: Of course, I agree with Brian. 

[11:33] Daniel DeMonte: In fact, I lean on his knowledge and his expertise in pricing, you know, credit risk, operational risk, what What do you have? 

[11:41] Daniel DeMonte: What do you get? What's the upside? What's the downside? 

[11:45] Daniel DeMonte: When you're moving into a place where you can't confirm, or you're basically telling a story about a loan, and when there's a gap, maybe it's missing documentation, maybe there's a collateral piece that isn't available or isn't accurate, that's when you start to move into places that could affect the performance, and performance will affect price. 

[12:05] Daniel DeMonte: And so you may not have an original note and maybe an LNA, which doesn't again make it a bad thing. 

[12:10] Daniel DeMonte: It just increases the risk required. 

[12:13] Daniel DeMonte: Making sure title policies are in place, the assignment chains are done properly, the collateral. 

[12:19] Daniel DeMonte: If there's a collateral defect, can you define it? Explain why it's there. Explain what happened. 

[12:24] Daniel DeMonte: Fear of the unknown will create consternation for people in the market. 

[12:29] Matt Sexton: You talk about performance issues. It kind of leads me to my next question. 

[12:33] Matt Sexton: Brian, when a loan outside of the agency box starts to show problems, how early should a lender be thinking about how it would sell? 

[12:41] Matt Sexton: What does getting ahead of it look like in practice? 

[12:44] Brian Dunn: Yeah, well, one of the things I think we see, you know, strictly on a pricing and analytics side is oftentimes when, you know, loans can start to show problems and go delinquent and then ultimately become non-performing, you know, there might be times where, you know, there is still quite a bit of value in that non-performing loan, especially if there's equity there. 

[13:04] Brian Dunn: However, you know, an asset manager or a lender might not be you know, sort of set up to, you know, either mitigate that outcome or just lead that to a resolution once, you know, it either goes delinquent or gets into like a foreclosure situation. 

[13:18] Brian Dunn: So, you know, from a pure kind of pricing and analytics standpoint, there can be value. 

[13:23] Brian Dunn: However, you know, the operational logistics of kind of realizing that value, you know, might not be in the core kind of DNA of a particular lender or asset manager. 

[13:31] Brian Dunn: So, you know, something where it might be more advantageous to kind of, you know, realize the value through a sale, you know, as opposed to holding it and trying to extract the value via a workout yourself. 

[13:43] Matt Sexton: Ian, what would you say about that? 

[13:45] Daniel DeMonte: I would've said earlier is better, but we actually, we have a platform that's even better than that. 

[13:51] Daniel DeMonte: People will have loans that will end up in that, you know, non-performing or scratch and dent space. 

[13:57] Daniel DeMonte: So what we do for a lot of clients is on a weekly, monthly, quarterly basis, we'll either value the asset, that they have or give them market color. 

[14:06] Daniel DeMonte: This way they know going in what they're dealing with. You don't want to be an ostrich. 

[14:10] Daniel DeMonte: You don't want to put your head in the sand. None of that comes out good. 

[14:13] Daniel DeMonte: You know, hope is not a good plan. You know, the market's moved against us. 

[14:17] Daniel DeMonte: The 10-year is now at 5.25. Let's hang around. Don't do it because 5.25 could be 5.50, could be 4.75. 

[14:25] Daniel DeMonte: You know, the reality is in our industry, and I've been doing this for 30 years, rates move up like an elevator and down like a feather. 

[14:30] Daniel DeMonte: So you don't want to wait. You don't want to fester. You don't want to do any of those things. 

[14:35] Daniel DeMonte: And by giving people on a weekly or monthly or quarterly basis a true insight into what they're doing, they know what they have, they know where the risk is associated even before that loan goes delinquent, 'cause they know the characteristics of the loan as we do. 

[14:49] Daniel DeMonte: And we get that information through Brian or Matt Holt, who runs our desk, or my colleague Derek Hetz. 

[14:54] Daniel DeMonte: And so that's super important. Don't be afraid of it. 

[14:57] Daniel DeMonte: It's, you know, it's not I've done something wrong. It is just a derivative of the marketplace. 

[15:02] Daniel DeMonte: That's mortgages are never gonna change. 

[15:05] Daniel DeMonte: The vast majority on a very high level perform and perform well. 

[15:08] Daniel DeMonte: The ones that don't, you want to make sure you address them, address them quickly, and make sure you minimize your losses throughout the process. 

[15:16] Matt Sexton: Like that data and analysis is going to lead us to the next question as well. 

[15:19] Matt Sexton: Bryant, if a lender came to you and asked what they could do right now to get better results when they sell non-agency loans later, what would you tell them about that? 

[15:28] Brian Dunn: Yeah, and I know, you know, Dan will have, you know, a good amount to add on this question. 

[15:31] Brian Dunn: But I think from, from my perspective, you know, what I would say is sort of having you know, multiple, you know, types of buyers and, and kind of multiple exits in the space. 

[15:41] Brian Dunn: So that can include, you know, selling into, you know, insurance companies, aggregator issuers, or, or even having, you know, warehouse financing set up. 

[15:48] Brian Dunn: So having sort of multiple, you know, multiple points of exit in addition to kind of multiple, you know, relationships where, you know, you can have a situation where, you know, you, you can sort of execute on best execution as opposed to only having, you know, a single You know, vehicle to sell into. 

[16:05] Matt Sexton: Dan, if you'd like to share your thoughts as well. 

[16:07] Daniel DeMonte: Yeah. So I think what Brian again says is very important. 

[16:12] Daniel DeMonte: The time to get a new source or new investors, not when you need them. 

[16:15] Daniel DeMonte: And it's not even a number, you know, I have clients that'll say, well, I've got 10 different options. 

[16:20] Daniel DeMonte: That doesn't mean they're the 10 best options. 

[16:23] Daniel DeMonte: That means those are the 10 that, you know, very big market, very broad market. 

[16:26] Daniel DeMonte: If you look at where we fit in, When the CITES AMC business, and if you we do this internationally, 5,000 employees across the world, we face 1,500 clients. 

[16:36] Daniel DeMonte: We see and we live and we function within the confines of the market. 

[16:40] Daniel DeMonte: So you really want to know what's out there. And the other thing you have to worry about is people. 

[16:44] Daniel DeMonte: I was literally on the phone with one of my clients this morning, and they're in the DSCR business, and they're owned by a very large asset manager. 

[16:50] Daniel DeMonte: And that asset manager in a particular part of his business has kind of moved out of the fray to say, "Hey, we don't want this particular characteristic," whether it's DSCR loan, which it was, or the fight. 

[17:01] Daniel DeMonte: or the LTV or the DSCR ratios. 

[17:03] Daniel DeMonte: So now you need someplace else and you can't be in a position where that happens and then you're scrambling and you're struggling because you probably are and everybody else is. 

[17:14] Daniel DeMonte: It was a move in the market where the pricing had changed and demand structure had changed with investors for 5 to 8 unit multifamily properties, which is a very good business, but they weren't performing as good as some of the 1 to 4s. 

[17:25] Daniel DeMonte: And so if you didn't have an additional resource, you may be stuck whether the, you originated the loan, You aggregated the loan, or you're going to see more performance degradation in the form of a security. 

[17:37] Daniel DeMonte: So you really want to be aware of who's doing what in the market. 

[17:41] Daniel DeMonte: And people come into the market, they go out of the market. So you want to be prepared to do that. 

[17:45] Daniel DeMonte: And for us, it's not just the concept of a scratch-and-dent loan. We do a lot of new production. 

[17:51] Daniel DeMonte: No matter what you have or where you want it to go, you need to understand you have people and investors behind it. 

[17:57] Daniel DeMonte: And it could be a cover bid that may help you do what you want to do. 

[18:01] Daniel DeMonte: But you need to be well-versed in a marketplace. And this is, it's very difficult. 

[18:05] Daniel DeMonte: This is what we do for a living, hours and hours and hours a week. 

[18:09] Daniel DeMonte: And so as much as if you're a trader or you're managing capital markets, you could know the market. 

[18:14] Daniel DeMonte: You just can't do what we do because there are 100 of us or so in the advisory group that do this for a living and do nothing but this. 

[18:22] Daniel DeMonte: For those reasons, we're a great resource. 

[18:24] Daniel DeMonte: We provide great insight and true expectation of where the market is and where it's going. 

[18:30] Matt Sexton: Should always leave it to the professionals when you're looking for that outstanding advice. 

[18:33] Matt Sexton: That's why you go to Sidus AMC for these sorts of things. 

[18:36] Matt Sexton: Before we wrap up this edition of MPA Talk, I wanted to just get some last-minute thoughts. 

[18:41] Matt Sexton: So Brian, we'll start with you. 

[18:43] Matt Sexton: Anything you'd like to share with our audience before we wrap up that maybe we didn't cover today? 

[18:47] Brian Dunn: Sure. Yeah. 

[18:47] Brian Dunn: One, one thing I think, you know, recently, you know, we were down at ABS East in Miami about 2 weeks ago. 

[18:53] Brian Dunn: And, you know, I think we were, I guess, pleasantly surprised that the tone was, you know, fairly constructive despite all of the rate volatility and a bit of spread widening that we kind of saw in September and into October. 

[19:07] Brian Dunn: I think we were expecting the tone to be more cautious or maybe perhaps even a little bit more pessimistic than it was, just kind of given all of the volatility. 

[19:15] Brian Dunn: But, you know, it sort of proves out that there still is a pretty strong demand for assets, you know, despite the recent rate volatility that we've seen. 

[19:24] Brian Dunn: So I think that's something that we were, you know, I guess pleasantly surprised by. 

[19:28] Matt Sexton: Dan, any final thoughts? 

[19:30] Daniel DeMonte: I was at the MBA in Chicago, and since that group is more akin to origination versus trading, they were a little more conservative and generally are a little more concerned about where interest rates are today and where they're going and where the 10-year is. 

[19:46] Daniel DeMonte: And that's an amalgamation of things from Economy, employment, geopolitical issues, all that kind of stuff. 

[19:53] Daniel DeMonte: So a little more conservative in doing that, which is not unusual because these are either mortgage banks or just pure banking community, you know, banking communities where they come from, but still very liquid, still very good market. 

[20:05] Daniel DeMonte: I think for me it's all about being proactive versus reactive. 

[20:11] Daniel DeMonte: You don't want to get that call from a buyer or a seller or your boss Or title comp, whatever it may be, be prepared. 

[20:20] Daniel DeMonte: In order to be prepared, you should align yourselves with companies. 

[20:23] Daniel DeMonte: We're not the only one, but we are significantly important in this space because of how we face the industry. 

[20:32] Daniel DeMonte: And there we have 6 or 7 divisions. 

[20:34] Daniel DeMonte: So where we price and where we hedge and where we analyze and where we trade and where we diligence. 

[20:41] Daniel DeMonte: And so We are very much an interactive portion of this industry. And so we pull that all together. 

[20:48] Daniel DeMonte: Be upfront, do your homework, move faster versus not. 

[20:52] Daniel DeMonte: I had a client come in and they were trying to get out of a loan and they didn't price the pool properly, $10 or $15 million, and they were hoping for the market to come back. 

[21:01] Daniel DeMonte: Again, not a good place to be. 

[21:04] Daniel DeMonte: Understand your risk, move towards the risk, not away from it, do it quickly, and then move on to continue your business. 

[21:12] Matt Sexton: That's really sound advice in any market, but especially the one we're currently in. 

[21:16] Matt Sexton: That's going to wrap things up for this edition of MPA Talk. 

[21:18] Matt Sexton: I want to thank Dan and Brian from Sidus AMC once again for joining us, and thank you for listening. 

[21:23] Matt Sexton: I'm Matt Sexton saying so long, and we'll talk to you again next time. 

[21:33] Matt Sexton: episodes on Apple, Spotify, Amazon, and all major listening channels. Just search for NPA Tour.