Rmbs Performance To Hold In 2026, But Cracks Are Forming

Moody’s Ratings analysts expect the performance of collateral in residential mortgage-backed securities (RMBS) to remain largely solid in 2026, although some deterioration is anticipated.

“Although mortgage losses will stay low with home prices largely steady on a national basis, delinquencies will rise further as economic growth slows and new loans remain weaker, with higher leverage,” the analysts wrote in a report released on Tuesday.

Moody’s data show that higher-leverage loans — jumbo and conventional mortgages with debt-to-income ratios of 43.1% or higher — now account for nearly 40% of new originations, up from about 20% in 2021.

RMBS investors closely track delinquency rates — which are expected to increase due to a weaker jobs market — along with prepayment trends, when assessing risk. 

Amid declining rates and renewed refinancing opportunities, overall prepayments are expected to “climb slightly,” the analysts said.

Recent vintage originations are more sensitive to even modest rate declines, while seasoned vintages — where most outstanding loans carry coupon rates below 5% — are expected to remain slow to prepay, they added. 

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

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

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

Privatization talks, new credit scores

On government-sponsored enterprise credit risk transfer (CRT) deals, Moody’s said collateral quality and transaction structures remain strong.

Borrower credit scores remain elevated, with Fannie Mae’s first-quarter 2025 loan acquisitions averaging 762, compared with a long-term average of 752 dating back to 1999.

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

“Meanwhile, the planned introduction of the use of VantageScores and new FICOs will also potentially affect collateral quality, given such use is untested,” the analysts said. 

According to them, only limited historical data is available for comparison, particularly from the global financial crisis period. The option to choose between scores could also increase the risk of lenders selectively using the most favorable score to boost originations.

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

Moody’s, however, also noted that ARM underwriting standards today typically account for future payment adjustments — a key credit-positive difference from pre-2009 practices. Similarly, for temporary interest rate buydowns offered by homebuilders, the loans are “typically underwritten to full payments.”

The non-QM space

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

For example, some lenders now allow investors in debt-service-coverage ratio (DSCR) loans  to use the properties’ full existing lease amounts without a cap on the difference from market rents, increasing risk if market rents decline.

Others lenders have reduced or eliminated requirements to source large deposits used for DSCR reserve accounts, further weakening credit protections.