Primer: Non-QM Residuals

Non-QM residuals are the "first loss" risk in a securitization; residuals are usually a package of tranches: the AIOS tranche, XS tranche and the B3 tranche. Non Qualified Mortgage is a home loan designed for borrowers who do not meet strict federal underwriting guidelines of a standard Qualified Mortgage, especially documentation. A residual investor effectively buys a pool of mortgages and finances the purchase in the securitization market, and retains these tranches. Residuals target low to mid double-digit returns for relatively short duration cashflows, and some buyers use additional leverage to further increase residual returns. Non-QM is a growing sector at ~$200bn outstanding, with REITs and private credit sponsors as the main buyers;