Note: This post contains highlights from our February 2025 monthly modeling call. You can register here to watch a recording of the full call (approx. 25 mins).

As we move further into 2025, key trends are emerging in the mortgage and credit markets, shaping risk management strategies for lenders, investors, and policymakers alike. RiskSpan’s latest model update highlights critical developments in mortgage prepayments, credit performance, and consumer debt trends—offering valuable insights for investors, traders, and portfolio/risk managers in these spaces.

Prepayment speeds have continued to decline in Q1 2025, largely due to a lack of housing turnover and persistently high mortgage rates. While a drop in rates during Q3 2024 temporarily mitigated lock-in effects for borrowers with very low rates, MBS speeds remain low across most cohorts.

Key drivers of observed prepayment behavior include:

  • Mortgage rates are expected to stay high (~6.5%+) throughout 2025, keeping refinancing activity muted.
  • Turnover remains the primary driver of prepayments, with most MBS pools significantly out of the money.
  • RiskSpan’s Prepayment Model v3.7 effectively captures these dynamics, particularly the impact of deep out-of-the-money (OTM) speeds based on moneyness.

Growth in Non-QM and Second Lien Originations

The private credit market continues to expand, with increasing Non-QM and second lien originations. However, a concerning delinquency trend has emerged, with delinquencies among 2022-2023 Non-QM vintages now rising faster than among older vintages.

Consumer Debt Pressures Mounting

Consumer debt continues to rise rapidly, raising concerns about long-term credit performance:

  • Credit card balances have increased significantly, with utilization climbing from 22% in 2020 to 30% by late 2024.
  • More consumers are turning to personal loans for debt consolidation, a sign of financial strain.
  • Second liens (HEL/HELOCs) are being used to pay off high-interest debt, fueled by strong home equity growth since 2020.

Model Enhancements

To address these evolving market conditions, RiskSpan has rolled out key enhancements to its mortgage and credit models:

  • Prepayment Model v3.7 – Captures deep out-of-the-money lock-in effects with improved accuracy across Fannie, Freddie, and Ginnie collateral.
  • Credit Model v7 – Introduces a Delinquency Transition Matrix, providing more granular forecasting for loans and MSR valuation.
  • Non-QM Prepayment Model – Developed using CoreLogic data, offering improved prepayment insights for Non-QM loans.

Looking Ahead

  • Rates are likely to remain high, with no reductions expected before summer.
  • Home equity growth remains strong, driving continued second lien origination.
  • Debt servicing costs are beginning to strain consumers, as high interest rates persist.
  • Delinquency rates show strong correlation to credit quality, signaling potential risks ahead.

The evolving mortgage and credit landscape underscores the importance of robust modeling and risk assessment. With prepayments slowing, debt burdens rising, and consumer credit trends shifting, lenders and investors must adapt their strategies accordingly.