Since its first rated transaction in February 2024, the rated residential transition loan (RTL) RMBS market has shown credit and structural performance that, according to Morningstar DBRS, has generally remained within the expected range, even as outstanding balances have fluctuated.
On average, Morningstar DBRS said the seasoning patterns in its rated RTL deals remain consistent with the asset class’s short history. Delinquencies in newer transactions tend to increase rapidly in the first year after issuance, while those in more seasoned deals mostly plateau after about 12 months.
“When we rate RTL transactions, we assume a certain level of delinquencies in our analysis,” said Corina Gonzalez, associate managing director at Morningstar DBRS. “For the most part, delinquencies have been in the range of expectations.”
Successful exits
Having avenues for successful exits is one consideration that issuers and investors are closely monitoring.
The Northeast and West Coast remain strong, despite higher risks due to limited supply.
“There is no question that increases in interest rates put pressure on housing, although it’s very market specific,” said Ketan Parekh, a managing director at Toorak Capital Partners, an asset management platform serving residential real estate investors that has a significant footprint in the RTL sector.
Parekh noted that the Northeast and West Coast remain strong, despite higher risks due to limited supply. Higher interest rates discourage owners with low-rate mortgages from selling, further restricting supply in these markets. Meanwhile, the Southeast and Southwest, which have seen strong growth and price appreciation, are now experiencing a soft market as prices correct from previous highs. However, this correction is gradual rather than abrupt, and supply shifts continue in certain areas.
“For us in the RTL space, when we’re looking 12 months to 18 months out for an exit, we factor these things into underwriting today,” said Parekh.
Overall prices remain steady, he explained, adding that he doubts the market will see a free fall in home prices. He is concerned about home pricing trends before the long term as investors plan exits, however. The question is where they are going to be from a leverage or loan-to-value (LTV) perspective when the project is complete–at 70% ideally.
“That’s the cushion we look for in the underwriting. Investors are looking at that too,” Parekh said.
The role of insurance companies
The concern over exits extends to the role of insurance money in the RTL space.
“Insurance companies have been purchasing a significant volume of residential whole loans, leading to a surge in insurance investment in this asset class,” said Dmitri Batsev, managing director at asset management firm Imperial Fund Asset Management. The problem is that insurance regulators—specifically the National Association of Insurance Commissioners (NAIC)—are increasingly discussing revisions to the rules that determine which types of residential mortgages that qualify for favorable capital treatment.
Batsev explained that although Imperial does not deal in the RTL sector, some market participants say that regulators have noticed the rapid growth of residential whole loans, including RTLs, on insurance company balance sheets. At issue is whether the NAIC will disqualify RTLs from the definition of residential whole loans or apply a completely different capital charge to the assets.
How issuers fund their RTLs could also be a deciding factor. If they rely solely on insurance money, the premiums used to cover policyholders’ claims, they probably should be wary of the regulatory issue. If insurance capital, which incorporates other financial resources to ensure the company’s solvency, is part of a company’s RTL capital stack, that company could worry less about this issue. In the current rate environment, if a firm has access to insurance money, it can probably earn a certain margin because its return profile differs from the markets.
The investor wouldn’t necessarily have to raise funds when interest rates go up, but the lender might take a hit to have the margin and reprice the rates they charge, Parekh said.
State of RTL securitizations
On securitization, Parekh said it was probably better to be an issuer in the first half of 2026 than it is now. With spreads slightly wider and benchmark rates higher, the aggregate cost of funding has gone up for issuers, and that ties into the rates, he said.
“Those of us that have issued debt have active revolvers that we could put assets into,” Parekh said. In those cases, he added, funding costs were fixed to the rate that was in effect whenever the debt was issued. For that bucket of money issuers are not subject to today’s funding costs.
