RMBS Credit Commentary: Step-up structures

Research evidence excerpt

RMBS Credit Commentary: Step-up structures

John Sim AC (1-212) 834-3124 Isabella Lee (1-212) 834-4148 North America Securitized J P M O R G A Njohn.sim@jpmorgan.com isabella.lee@jpmorgan.com Products Research

J.P. Morgan Securities LLC J.P. Morgan Securities LLC

Ani Gelashvili (1-212) 834-2605 31 July 2026

ani.gelashvili@jpmorgan.com

J.P. Morgan Securities LLC

RMBS Credit Commentary

Step-up structures

• Mortgage credit demand remains robust. Spreads moved slightly wider at quarter-

end but are already retracing tighter

• Higher rates are keeping RMBS total returns outperforming corporate bonds

• Housing market demand remains muted, however. We look at a state-by-state

breakdown of housing supply post-pandemic

• Every state has problems, including oversupply, affordability and insurance

dynamics, and buyer demand isn’t showing up to solve any of them

• Refinanced non-QM issuance has reached $6.5bn year-to-date

• Given where AAA coupons are, the question for investors is whether each deal’s

WAC provides sufficient room to support the 100bp coupon step-up for senior

bonds four years post-issuance

• Roughly 22% of deals have a ~6% GWAC paired with a ~5.5% AAA coupon, leav-

ing 50bp before accounting for any WAC erosion from prepayments

• Issuers have attempted to address this shortfall by redirecting a greater share of

cashflows to the senior bonds

• The most commonly found language allows the excess spread to cover the cap car-

ryover amount on the A classes. After the step-up date, B3 interest is also available

to pay the cap carryover amount. The second most common language makes excess

spread and B3 interest immediately available to the senior classes

• The third provision goes further: in addition to excess spread, subordinate bonds