From optional to probable: How redemption behaviour is reshaping RMBS pricing

Optional redemption is becoming an increasingly important pricing consideration in the non-agency re-performing and non-performing loan (RPL/NPL) market. As refinancing conditions have improved and call activity has accelerated, evaluated pricing providers face a growing challenge: understanding not only if a bond will be called, but also when the controlling parties are likely to redeem it.

When the Federal Reserve initiated its rate-cutting cycle in September 2024, the RPL/NPL sector emerged as the first corner of non-agency RMBS where investors were compelled to reassess pricing assumptions — shifting from maturity-based valuations to call-adjusted frameworks. The data reinforces this point: early redemptions in the sector fell in 2023 during the hiking cycle, then surged in 2024 as the Fed pivoted, before accelerating in 2025 and 2026. These patterns are not random; they reflect the interaction between call structures, collateral performance metrics — high delinquency rates, elevated coupons and relatively stable prepayment speeds — and issuer economics.

Since emerging in the aftermath of the subprime crisis, the RPL/NPL market has grown to account for approximately 12% of non-agency RMBS issuance. While nearly every active RPL/NPL transaction (99.7%) contains at least one optional redemption feature (Figure 1), the presence of a call provision alone tells us only when a bond can be redeemed — not whether it will be. For evaluated pricing providers, that distinction is fundamental to determining appropriate pricing assumptions.

Figure 1: LSEG analysis; underlying data provided by Intex

Controlling classes do not exercise calls simply because the contractual right exists. A call is only rational if the cost of redeeming the outstanding bonds and liquidating or re-securitising the collateral is justified by the prevailing rate environment and the deal's remaining cash flow profile. As financing conditions improved following the Federal Reserve's rate cuts beginning in late 2024, redemption activity accelerated and market participants increasingly shifted towards call-adjusted pricing assumptions.

The key question for pricing professionals, however, is not simply whether refinancing has become economically attractive, but how consistently issuers exercise those call rights once the opportunity exists.

Our analysis shows that historical redemption behaviour differs meaningfully across call structures. Although clean-up calls are the most common optional redemption feature in the RPL/NPL sector, they have rarely been exercised because many transactions also include earlier date-based call options. In practice, issuers typically redeem at the earlier date rather than waiting for collateral balances to amortise to clean-up thresholds.

Date-based calls tell a different story. Beginning with the 2023 vintage, issuers demonstrated markedly stronger execution discipline, with many transactions redeemed within zero to two months of the earliest call date and very few extending beyond 12 months. As seen in Figure 2, older vintages, by contrast, frequently remained outstanding for more than a year after becoming callable. This suggests that newer-vintage issuers are structuring deals with the explicit intention of calling at the first opportunity, and that the current rate environment has reinforced this behaviour.

Figure 2: LSEG analysis; underlying data provided by Intex

While call structure explains when redemption opportunities exist, issuer behaviour provides another valuable signal when assessing whether those opportunities are ultimately acted upon.

Historical redemption patterns vary across shelves, suggesting that controlling parties differ in how consistently they exercise optional redemption rights. Pretium (PRET) has consistently redeemed recent transactions within zero to six months of the earliest call date, while PRPM has generally exercised calls within 12 months. Residential Credit Opportunities (RCO Mortgage) and VCAT Asset Securitisation have also demonstrated successful call execution, although with greater variability and fewer observations. While historical behaviour cannot predict future decisions with certainty, it provides meaningful evidence when assessing the likelihood that a callable transaction will be redeemed.

This highlights an important distinction. Transaction structure provides the framework, but issuer behaviour provides evidence of execution discipline. Neither consideration is sufficient on its own. Together, they create a more robust basis for assessing redemption probability and developing appropriate pricing assumptions.

As optional redemption becomes a more significant driver of valuation outcomes, pricing callable RMBS requires a framework that incorporates transaction structure, market economics and historical redemption behaviour. For pricing services, the challenge lies in calibrating the probability that a call will be exercised by weighing not only structural triggers and historical patterns, but also the economic incentives of a counterparty whose decision-making framework is opaque. The data shows that vintage, shelf and rate regime collectively narrow the uncertainty, but they do not eliminate it. Determining whether to price to call remains a judgement call — one that demands continuous reassessment as the sector matures and new redemption data accumulates.

LSEG Pricing Services incorporates these inputs through market observations, structural analysis and proprietary redemption analytics to support more robust evaluation assumptions for callable securitised products. In a market where callable does not always mean called, the ability to distinguish between contractual possibility and probable behaviour is becoming an increasingly important differentiator in evaluated pricing.