Performance Report: Non-QM and Second Lien Mortgages, December 2025

Quick Insights

Non-QM: Underlying Credit Weakness and Growing Vintage Differentiation

• Organic weakness persists beyond Sunday month-end effect: Despite a modest MoM improvement, Overall and First-Time New Impairments remain materially above October levels, pointing to continued underlying credit deterioration.

• Never vintages are diverging: Despite elevated impairments at issuance, the 2024-H2 vintage is now tracking at parity with the 2022 vintage in purchase loans—despite nearly 200 bps higher GWACs—while 2023 and early-2024 continue to drive overall impairment pressure.

• dv01’s Non-QM prepayment model continues to track realized outcomes: After a brief divergence in October, the model reconverged with realized behavior in December, with differences narrowing to less than 0.5 CPR—reinforcing confidence that recent performance shifts reflect borrower composition rather than model breakdown.

Second Liens (CES & HELOC): Seasoning Effects Dominate as Credit Performance Remains Largely Intact

• Recent impairment increases are driven primarily by seasoning, not borrower stress: After improving through much of 2025, both Closed-End Seconds and HELOCs saw impairments rise in December, consistent with loan aging and elevated prepayment activity rather than a broad-based deterioration in credit quality.

• FICO remains the primary driver of performance across second liens: Lower-FICO borrowers continue to account for a disproportionate share of impairments in both products, while other traditional risk metrics—particularly CLTV—have become less informative, especially within HELOCs.

• Cure dynamics remain constructive, particularly in HELOCs: HELOCs continue to exhibit higher cure rates than other mortgage products, even as those rates have gradually declined through 2025, pointing to normalization rather than emerging stress.