Atlanta-based non-QM lender Angel Oak Cos., through its mortgage-backed securities conduit Angel Mortgage Trust, has unveiled its sixth private-label securities (PLS) offering of 2022, even as fast-rising interest rates have jumped far ahead of the lower-rate legacy loans securing the deal.
The average coupon is 5% for the pool of 795 non-qualified (non-QM) mortgages backing the current offering — dubbed AOMT 2022-6, valued at $389.3 million, according to a bond-presale report by Fitch Ratings.
Because non-QM, or non-prime, mortgages are deemed riskier than prime loans, in a normal market they generally command an interest rate about 150 basis points above prime agency rates, according to industry executives.
Freddie Mac’s latest Primary Mortgage Market Survey places the current rate for a 30-year fixed mortgage at 6.02%. The non-QM loans in Angel Oak’s six PLS offerings year to date, on average, are at least 1 percentage point below that prime agency rate.
Through mid-September of this year, Angel Oak has launched a total of six non-QM PLS offerings involving about 5,000 loans valued at $2.5 billion. Last year through mid-September, Angel Oak had brought a total of five non-QM securitization deals to market secured by 3,191 mortgages valued at $1.5 billion.
For all of 2021, the lender recorded eight non-QM PLS offerings secured by a total of 6,152 mortgages valued at $2.9 billion, according to bond-rating reports from Fitch Ratings and Kroll Bond Rating Agency.
“Historical performance [through 2021] for nonprime originations securitized by AOMT dates back to 2014; the performance to date has been strong relative to the credit attributes, reflecting a supportive economic environment, as well as sound underwriting and operational controls,” the Fitch presale report states.
That supportive environment shifted in 2022, however, as the prime rate doubled over the first half of the year, and now reaches beyond 6% for a 30-year fixed mortgage, compared with 2021, when rates averaged 3% or less for much of the year.
“We have got three securitizations across our Angel Oak family of funds this year [as of May 12],” Namit Sinha, co-chief investment officer at AOMR, said during the company’s first-quarter earnings call with analysts. “… And all of these deals have had coupons in the mid- to high 4% [range], which you would consider to be in the current context of the market discount coupons.”
That picture hasn’t changed much with the later PLS deals. Year to date, Angel Oak’s six PLS offerings have involved loan pools with an average coupon ranging from 4.5% to 5%, bond-rating reports show, with seasoning ranging from 7.4 to 10.7 months. That means all the PLS deals have been dominated by legacy loans from 2021, when rates were much lower than they are today.
Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, property flippers, foreign nationals, business owners, gig workers and the self- employed, as well as a smaller group of homebuyers facing credit challenges, such as past bankruptcies.
Angel Oak Mortgage Inc. (AOMR), a real estate investment trust that is part of the Angel Oak Cos. family, announced in August that it recorded a net loss of $52.1 million for the second quarter ended June 30 — bringing its total losses for the year to $95.7 million. AOMR recorded a $43.5 million net loss in the first quarter of the year.
AOMR is a long-term player in the non-QM mortgage market and is externally managed and advised by an affiliate of Angel Oak Capital Advisors. The Angel Oak Cos. family of affiliates also includes private non-QM lenders Angel Oak Home Loans and Angel Oak Mortgage Solutions.
Contributing to AOMR’s first-quarter loss was the “$2 million of securitization costs” associated with AOMR’s February 2022 PLS offering alone, Brandon Filson, AOMR’s chief financial officer, said during the company’s first-quarter earnings call on May 12.
The common theme in the earnings results for both quarters is the impact of fast-rising interest rates and rate volatility on Angel Oak Cos. residential mortgage holdings and operations. In general, lower-rate mortgages are at a competitive disadvantage in terms of pricing in securitization and loan-trading liquidity channels in such an environment because they are worth less than the newer crop of higher-rate mortgages coming online. Keith Lind, CEO of non-QM lender Acra Lending, put it this way: “These aren’t bad loans, just bad prices.”
“We continued to experience a challenging economic environment in the second quarter of 2022,” said Robert Williams, president and CEO of AOMR, reflecting on the company’s latest earnings report. “Historic inflationary pressures resulted in continued volatility, both in nominal interest rates and in the widening of interest rate spreads, driving unrealized losses on our portfolio of target assets.”
AOMR has bulked up its warehouse lending arsenal to help bolster liquidity to better cope with the volatility of the current market. Its second-quarter earnings report shows that it added a new $340 million warehouse financing facility during the quarter, and since the end of the second quarter it increased the capacity of an existing warehouse line by $260 million — to a total of $600 million. The added warehouse financing capacity brings “the maximum availability on all financing lines to $1.9 billion,” the REIT reported.
“The lower-coupon loans have become sort of orphans of the market,” Lind said in a prior interview focused on the overall PLS market, not Angel Oak specifically. “Investors are not jumping to buy bonds backed by [mortgage loans with] coupons so low that the loans [in the collateral pools] can’t even cover the coupon on the bonds and securitization [costs].
Even in the face of those headwinds, Angel Oak’s securitization pipeline this year continues to stay on pace with 2021 — even slightly ahead of pace. Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions, said in a prior interview that “nobody really knows where this [rate volatility] is going to stop because there’s so many factors that that make up rates.” Among those factors is the Federal Reserve’s drive to fight inflation by bumping up the benchmark federal funds rate, with another increase of at least 75 basis points expected to be announced on Wednesday, September 21.
“The interest in securitization and investing in this space is still very strong,” Hutchens added. “The hiccup that we’ve seen isn’t a credit issue. No one’s concerned about the quality of non-QM loans — it’s just that the rate environment has been so crazy.”