Decoding the New Wave of 'Non-Prime' Mortgage-Backed Securities

NEW YORK, NY – December 11, 2025 – In a move signaling the continued, robust expansion of the non-agency mortgage market, Kroll Bond Rating Agency (KBRA) has assigned preliminary ratings to a new $328.4 million residential mortgage-backed security (RMBS). The deal, known as CROSS 2025-H10 Mortgage Trust, is collateralized by 576 residential mortgages, but it is the nature of these loans that is drawing keen interest from market participants. A “meaningful concentration” of the collateral is considered “non-prime,” a term that evokes memories of the 2008 financial crisis but represents a vastly different landscape today.

Sponsored by the established partnership of Hildene Capital Management, CrossCountry Mortgage (CCM), and CrossCountry Capital, this latest transaction is another data point in a record-breaking year for a market segment that caters to borrowers outside the traditional 'prime' lending box. As investors navigate an environment of high interest rates and economic uncertainty, the structure and performance of these securities offer a crucial window into the evolving dynamics of risk and credit in the U.S. housing market.

The Re-Emergence of 'Non-Prime'

The term 'non-prime' in today's market is a broad descriptor, a world away from the loosely underwritten 'subprime' loans of the past. It primarily encompasses Non-Qualified Mortgages (Non-QM), which fall outside the strict criteria for loans eligible for purchase by government-sponsored enterprises like Fannie Mae and Freddie Mac. These are not necessarily loans to borrowers with poor credit. In fact, many Non-QM borrowers have strong credit profiles, with average FICO scores often exceeding 730.

The key difference lies in their documentation and purpose. The Non-QM market provides vital credit to self-employed individuals who use bank statements to verify income, or to real estate investors who qualify based on the cash flow of a property using Debt Service Coverage Ratio (DSCR) loans. The CROSS 2025-H10 pool reflects this modern composition, comprising 84.7% fixed-rate mortgages and 15.3% hybrid adjustable-rate mortgages (ARMs), catering to a diverse set of borrower needs.

However, the growth in this sector is not without its cautionary notes. While delinquency rates for Non-QM loans have remained manageable—with 60+ day delinquencies hovering around 3.6% in mid-2025—there are signs of increasing risk appetite across the broader credit spectrum. Recent data indicates a rise in lending to borrowers with credit scores below 620, with this cohort accounting for a 6.5% share of new mortgages, the highest level since 2014. This expansion underscores the critical role of sophisticated risk assessment and transparent rating methodologies in maintaining market stability.

A Programmatic Partnership Driving Volume

The CROSS 2025-H10 transaction is not an isolated event but the product of a well-oiled machine. It represents the latest issuance from a multi-year strategic relationship forged in late 2022 between Hildene Capital Management, a credit-focused asset manager with approximately $16.8 billion under management, and mortgage originator CrossCountry Mortgage. This partnership gives Hildene exclusive access to a pipeline of CCM's Non-QM originations, which are then systematically packaged and sold to investors through the 'CROSS' shelf of RMBS securitizations.

The strategy has been remarkably prolific. By August 2025, Hildene had already completed its sixth Non-QM securitization of the year, bringing its year-to-date issuance volume to a staggering $2.7 billion. Since the partnership began, the firms have successfully brought 16 such deals to market. This programmatic approach provides a steady supply of securities for an investor base hungry for yield and diversification, cementing the sponsors' position as dominant players in the Non-QM space.

The consistent flow of deals, including recent transactions like the $496.3 million CROSS 2025-H6 and the $495.5 million CROSS 2025-H8, demonstrates a deep conviction in the performance and appeal of these assets. For CrossCountry Mortgage, it provides a reliable outlet for its originations, while for Hildene, it creates a scalable investment product for its clients.

Gauging Investor Appetite Amid Economic Headwinds

Despite a backdrop of persistently high interest rates and housing affordability challenges, investor demand for Non-QM RMBS has been insatiable throughout 2025. Issuance has shattered previous records, with analysts at major banks like JP Morgan revising their full-year forecasts upwards to $60 billion. By October, the market had already surpassed that figure, fueled by high margins and strong borrower demand.

This investor appetite is broad-based, attracting money managers, insurance companies, pension funds, and hedge funds. Previous deals on the CROSS shelf have been heavily oversubscribed, with some attracting over 60 unique investors and billions in orders, indicating that new capital continues to flow into the asset class. Spreads on the highest-rated tranches have been tightening, reflecting confidence in the credit quality and structural integrity of the deals.

Investors are drawn by the potential for higher yields compared to traditional agency-backed securities. Yet, they remain highly focused on risk. The performance of the underlying collateral is scrutinized, with particular interest in loans to real estate investors (DSCR loans), which have performed well. The enhanced credit analysis and structural protections built into modern RMBS deals provide a level of security that was absent in the pre-crisis era, giving investors the confidence to participate in this growing market.

The Rating Agency's Role: A Look Under the Hood

Central to this confidence is the rigorous evaluation process conducted by credit rating agencies like KBRA. For the CROSS 2025-H10 trust, KBRA deployed a multi-faceted approach to assign its preliminary ratings. This process is far more granular and data-driven than those used in the early 2000s.

KBRA’s proprietary Residential Asset Loss Model (REALM) performs a loan-level analysis, projecting potential losses based on a wide array of borrower and loan characteristics. This quantitative analysis is supplemented by a thorough review of third-party due diligence reports, which verify the integrity of the information in the underlying loan files. Furthermore, cash flow modeling is used to stress-test the transaction’s payment structure, ensuring that the various bond classes can withstand different economic scenarios. Finally, the agency assesses the operational capabilities of the key parties involved and the soundness of the deal's legal framework.

This meticulous process helps explain why a deal with 'non-prime' collateral can still achieve high investment-grade ratings for its senior tranches. The CROSS 2025-H10 deal is just one of a flurry of similar securitizations in late 2025 from issuers like Rithm Capital and Lone Star, all of which undergo similar scrutiny. This disciplined approach is fundamental to the market's current stability, providing the transparency and risk differentiation necessary for investors to make informed decisions in an increasingly complex credit landscape.