KBRA Assigns Preliminary Ratings to Morgan Stanley’s MSRM 2025-HX1: A Deep Dive Into a $299.4 Million Non-Prime RMBS Deal
Kroll Bond Rating Agency (KBRA) has assigned preliminary ratings to eight classes of residential mortgage-backed securities (RMBS) issued by the Morgan Stanley Residential Mortgage Loan Trust 2025-HX1 (MSRM 2025-HX1). This transaction, totaling approximately $299.4 million, represents Morgan Stanley’s continued activity in the non-prime RMBS market and underscores the growing role of non-traditional borrowers and alternative income verification methods in shaping the modern mortgage-backed securities landscape.
The MSRM 2025-HX1 transaction is backed by a pool of 787 residential mortgage loans, all originated by HomeXpress Mortgage Corp., a lender known for serving borrowers outside traditional underwriting standards. This pool is distinct in its composition, with a significant concentration—approximately 90.5%—of loans underwritten using alternative forms of income documentation. These loans typically cater to self-employed borrowers, gig workers, and others whose income sources may not fit the traditional mold of W-2 employment or consistent paycheck reporting.
Collateral Overview: A Focus on Non-Prime and Non-QM Loans
One of the most defining characteristics of this RMBS pool is its emphasis on non-qualified mortgage (Non-QM) and exempt loans. According to KBRA’s breakdown, approximately 16.7% of the loans in the MSRM 2025-HX1 transaction are classified as Non-QM under the Consumer Financial Protection Bureau’s (CFPB) Ability-to-Repay/Qualified Mortgage (ATR/QM) rule, while an even larger segment—62%—is considered exempt from the rule entirely. These exempt loans were largely originated for business purposes, meaning they were not subject to the same consumer protection standards, including verification of a borrower’s ability to repay the mortgage using conventional guidelines.
This classification has implications for both risk and compliance, and it also highlights a broader market trend: the continued growth of investor-oriented and business-purpose lending. These loan types have gained prominence amid rising home prices, increased self-employment, and a more fragmented labor market. By serving niche borrower profiles, lenders like HomeXpress are capturing market share in segments underserved by traditional banks and government-sponsored enterprise (GSE) programs.
KBRA’s Rating Methodology and Analytical Approach
KBRA’s evaluation of the MSRM 2025-HX1 transaction involved a multi-faceted analysis, employing its proprietary Residential Asset Loss Model (REALM) to assess expected losses on the underlying mortgage pool. The agency also conducted cash flow modeling to examine how payments would be distributed across the different bond classes under various stress scenarios.
In addition, KBRA reviewed third-party due diligence results to assess underwriting quality and compliance, evaluated the operational and financial health of transaction participants (including the servicer and trustee), and examined the legal framework and documentation governing the structure.
KBRA emphasized that its U.S. RMBS Rating Methodology—which provides a framework for analyzing and rating transactions backed by residential mortgage loans—was applied throughout the process. The agency’s approach blends loan-level data analytics with macroeconomic assumptions and stress scenarios to arrive at credit risk profiles for each tranche.
Market Context: Increasing Demand for Non-Prime Mortgage Backed Securities
The MSRM 2025-HX1 transaction reflects a broader resurgence in non-prime RMBS issuance, driven by growing investor appetite for yield in a challenging interest rate environment. While traditional, GSE-backed securities continue to dominate the RMBS market, non-prime deals like this one offer attractive returns—albeit with higher credit risk and greater sensitivity to economic conditions.
The substantial concentration of alternative documentation and business-purpose loans in this transaction aligns with a shifting borrower profile that has become more common post-pandemic. As more Americans engage in self-employment, contract work, and real estate investing, the mortgage industry has adapted by developing specialized products and underwriting frameworks to serve these demographics.
HomeXpress Mortgage Corp., the sole originator of the loans in this pool, has positioned itself as a major player in this evolving space. The lender offers a range of Non-QM loan products and has built a robust infrastructure for processing non-traditional income documentation, which has contributed to its increasing role in securitizations like MSRM 2025-HX1.
Structural Details and Tranche Ratings
Though KBRA has not yet publicly disclosed individual tranche ratings in detail, the agency confirmed that it has assigned preliminary ratings to eight classes of certificates in the MSRM 2025-HX1 deal. Each tranche represents a different level of risk exposure and cash flow priority, ranging from senior-most classes with high credit enhancement levels to subordinate tranches that absorb losses first.
KBRA’s analysis incorporates assumptions about default probability, prepayment behavior, and loss severity across the pool. The cash flow model also accounts for waterfall structures, triggers, and interest rate movements that could impact investor returns.
Investors and analysts can access the full set of ratings and reports on KBRA’s website, including the official MSRM 2025-HX1 Tear Sheet, methodology documents, and additional structured finance disclosures. This transparency is key in ensuring market participants can fully assess the risk profile of the deal.
Regulatory Considerations and ESG Factors
In its official report, KBRA also addresses environmental, social, and governance (ESG) considerations, though it does not cite them as principal drivers behind its ratings. Nonetheless, the agency makes clear that it evaluates such factors in the context of their material impact on creditworthiness. For example, social trends affecting borrower behavior—such as housing affordability and employment volatility—are indirectly reflected in credit risk assessments.
From a regulatory standpoint, exempt loans present a unique challenge. Because they fall outside the ATR/QM rule, they carry fewer consumer protections. However, they are also subject to less stringent underwriting requirements, which may result in elevated default risk during periods of economic stress. KBRA’s credit models are calibrated to account for such dynamics.
A Closer Look at KBRA’s Disclosure Practices
Transparency remains a hallmark of KBRA’s methodology. In accordance with regulatory guidelines and internal best practices, KBRA has made available detailed information on its rating methodology, key assumptions, and model inputs used in the MSRM 2025-HX1 rating process. These disclosures include sensitivity analyses showing how various factors—such as interest rates, home price declines, and borrower delinquencies—might affect each tranche’s performance.
In addition, KBRA provides readers with a clear explanation of each rating category, from AAA to below investment grade, and outlines the rationale for assigning each rating. The agency’s Information Disclosure Form for this transaction is available for download and offers further insight into data sources, model outputs, and conflict-of-interest policies.
Conclusion: A Snapshot of Today’s Non-Prime RMBS Landscape
The preliminary ratings assigned to Morgan Stanley’s MSRM 2025-HX1 transaction by KBRA offer more than just a credit opinion—they provide a lens into the evolving world of residential mortgage lending. The deal’s structure, collateral composition, and underwriting profile illustrate the continued rise of non-prime borrowers, alternative documentation, and business-purpose loans in the post-pandemic housing market.
As investor interest in non-agency RMBS grows, transactions like MSRM 2025-HX1 highlight both the opportunities and challenges of navigating an increasingly complex and diverse mortgage landscape. With robust due diligence and a disciplined approach to risk analysis, KBRA’s assessment equips investors with the tools needed to make informed decisions in this dynamic asset class.
For more information, detailed tranche ratings, and methodology documents, readers can visit www.kbra.com.
