Mortgage Notes: Desperately Selling DSCR; Can UWMC Pivot to Stability?

July 13, 2026 | This week in The Institutional Risk Analyst, we feature the latest edition of Mortgage Notes, one of our regular features. While everyone and anyone able to operate a smart phone seems to be involved in non-QM lending, we continue to see and hear indications that the bloom is off the rose in the world of non-QM and particularly debt service coverage ratio (DSCR) loans, an early indication of larger problems ahead in residential mortgage finance. 

“In plain English... a DSCR loan is a mortgage on a rental property where the bank basically shrugs at your pay stubs and asks one question: does the rent cover the payment?,” writes Rich Swerbinsky on LinkedIn. “If the house pays for itself, you qualify. It is landlord lending, demand is surging, and it carries higher risk and higher margin than a standard agency loan.”

“The plain-vanilla agency loan gets sold straight to Fannie, Freddie, or a big aggregator,” Swerbinsky continues, “But non-conforming loans, DSCR and the rest of the non-QM world, do not qualify for that path. So they get sold, directly or indirectly, into private-label securities: a few hundred loans pooled together and turned into a bond that investors buy. It is the corner of the market growing the fastest...”

The market for Debt Service Coverage Ratio (DSCR) loan securitizations — part of the Non-QM residential mortgage-backed securities (RMBS) market — reportedly is dominated by Verus Mortgage Capital, Angel Oak Capital Advisors (AOMR), and Redwood Trust (RWT), but most of the larger lenders are involved as well. JPMorgan (JPM) and Goldman Sachs (GS) are the leading issuers of non-QM and DSCR deals.

If you can fog a mirror, you can get a DSCR loan for a rental property. The good news is these loans typically require 30-40% down payments, but that may not help if the asset is overvalued. This has led to a rather pernicious problem of home buyers pretending to want to get a DSCR loan for a rental investment, then instead living in the house as their primary residence. Unfortunately this is illegal, but high home prices and rising interest rates tend to increase the risk of fraud to lenders and investors alike.

TBA: FANNIE MAE 5.5s for August

Source: dataQollab

Moving into a property financed with a Debt Service Coverage Ratio loan is a violation of your loan agreement. Because these are non-owner-occupied business loans, Housing Wire notes, using the home as your primary residence breaches the occupancy affidavit you sign at closing, putting you at risk of loan acceleration, foreclosure, and potential state and federal mortgage fraud charges.

But the greater risk to borrowers and investors is the widely held illusion that the valuations for rental properties grow to the sky.  Take the example of China, where two decades of home price appreciation has been reversed and home prices have now fallen steadily for the past three years. How did this happen? Because the Chinese foolishly imitated the US mortgage market and particularly the flawed methodology for tracking home prices, giving their citizens a false image of the actual conditions in the housing market.

“You need to understand that the Chinese have copied the U.S. approach of repeat sales indices,” notes Berlin-based housing expert Hans-Joachim (Achim) Dübel, “without having the transaction volumes. So what you ‘measure’ in terms of house prices is essentially condo flipping of speculators. Repeat sales indices exacerbate price moves in both directions.”

Repeat sales indices like the S&P CoreLogic Case-Shiller or FHFA HPI measure price changes of the same properties over time. They sometimes inflate home price appreciation compared to the broader housing stock because they exclude renovations, drop highly distressed sales, and are subject to selection bias. A 2011 paper published by the Federal Reserve Bank of St Louis noted:

“Housing price indexes are calculated by tracking home prices in a given region over a period of time. Ideally, one would track the price of a random sample of houses. However, this method has operational problems because, at any particular point in time, not all houses are for sale; additionally, there may be variations in the type of houses sold. If one merely tracked the price of homes sold over time (e.g., as is found in median house price indexes, such as the NAR and the Census indexes), observed changes could be due to changes in the composition of homes sold as opposed to changes due to market conditions. Dealing with houses that differ in "hedonic" characteristics—such as the square footage, number of bedrooms and distance from city center—can be tricky.”

For those of you fortunate enough to read our 2024 biography of Freedom Mortgage founder Stan Middleman, "Seeing Around Corners," the smart money got out of the US mortgage market in mid-2005 -- three years before the GFC. But this time around, the crowd chasing private label mortgages is far larger. For many investors, it's already too late to get out.

One insider tells The IRA that the massive boom in DSCR loans to fund rental properties is no surprise and that the same phenomenon was seen in the 2000s, prior to the 2008 mortgage market collapse. The crowd this time around is bigger and includes many institutional investors. He relates:

“I think that there's multiple aspects of how the industry has bifurcated. Most of the folks that were in the distressed asset game post-GFC moved into private credit. It's also, by the way, private credit and private lending, asset-backed lending. Whether it's on mortgages or any other types of assets, is also where the guys that ran Countrywide and Option One. A lot of the folks who never got handed any responsibility for the exotic way that they originated loans to consumers just went to private credit.”

DSCR loans are attractive for lenders because they can feed the originate-to-sell machine and manufacture the appearance of profitability, but without the regulatory risk that accompanies residential mortgages. The borrowers are supposedly investors and DSCR loans are commercial loans or what is know as “business purpose loans.” There is far less media attention on this market because, in legal terms, these are commercial loans. Also, it's literally an easier asset to foreclose, but the borrowers are often consumers chasing fix-and-flip opportunities rather than professional investors.

“Of course, memories are very short,” relates the insider. “If you're a 35-year-old managing director at Goldman Sachs or Blackstone, which, by the way, many of the managing directors are in their 30s and some of them even still in their 20s. Those people were in high school or middle school when the last mortgage crisis hit, when there was any sort of real turbulence or downturn in the real estate economy or the economy in general. So they are ill-equipped from a experience perspective on what markets look like when they're not just headed in one direction.”

Smarter investors have already figured out that we are headed for a correction in housing. A growing number of private lenders are reportedly looking to sell pools of non-QM mortgages and DSCR loans -- this even as street firms like Goldman and JPMorgan are pumping out securitizations of new deals at a brisk pace.

“You know, anecdotally, the number of private lender calls and texts that I get on a personal level is starting to scare me,” the insider confesses. “A year ago, I would get one or two texts a week from investors in the non-QM world or, you know, a private lending group or some broker that wants a quick closing. Now I'm seeing one or two inbounds a day. I'm getting text messages. I'm getting phone calls. I'm getting offers of second mortgages. I'm getting offers of first mortgages. It seems like there is almost a level of desperation within private credit. It kind of feels like the hysteria in the 2005 era when the Alt-A market began to crack.”

The Mortgage Surveillance Group

Below we take a look at our mortgage surveillance group, twenty-seven publicly traded stocks that track the world of residential mortgage finance. More than half of the members of the group are down over the past several months since the start of the Iran war and the resulting surge of inflation. As we've noted, the markets have taken interest rates up even though the FOMC has yet to act.

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