The difference between interest rates on non-QMs in MBS and the interest rate paid to investors in the securities is helping to protect investors from losses. Excess spread in the sector increased as seasoned loans were repackaged.

Changes to underwriting standards and home price appreciation helped investors in non-agency MBS largely avoid losses during the pandemic. By comparison, cumulative losses on subprime MBS during the financial crisis of 2008 hit nearly 20%.

The definitions used by non-agency MBS lenders and issuers aren’t consistent and many terms haven’t been updated since 2009. The MISMO and the SFA are separately working on setting new standards.