Angel Oak Faces the Challenges of Market Volatility and Rapidly Rising Rates
Angel Oak Co., through his Angel Oak Mortgage Trust led, recently unveiled its latest Private Label Securitization (PLS) offering – a deal expected to close in early August and backed by 788 mostly non-QM loans valued at $362 million.
Including this latest offering, Angel Oak Cos. – through its affiliates, including real estate investment trust, or REIT, Angel Oak Mortgage Inc. (AOMR) – has brought to market a total of five PLS deals backed by mortgage pools worth of $2.1. billion.
For the whole of last year, in a much calmer economic environment, non-QM lender Angel Oak closed a total of eight PLS deals worth $3.8 billion.
So it looks like Angel Oak’s liquidity channels are open for business this year, despite what the lender’s asset management arm, Angel Oak Capital Advisorsdescribed in a recently published “2022 Mid-Year Outlook” white paper as a very difficult market for non-agency residential mortgage-backed securities (RMBS).
The question remains, however: is Angel Oak’s liquidity strategy robust enough to see it through the current economic environment, marked by high market volatility and rapidly rising interest rates?
“The non-agency RMBS technical chart since the end of last year has been a headwind for valuations since the start of the year,” the Angel Oak whitepaper said. “Not only have non-agency RMBS been under pressure for the same reasons that affect agency MBS, … (e.g. soaring rates and soaring volatility), but also a robust new issuance schedule, especially in unqualified markets. [non-QM] mortgage sub-sector, further weighed on [MBS] valuations.
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“…This sturdy [PLS] the pipeline is finally starting to clear, which should start to slow emissions significantly in the second half of 2022. In the meantime, increased supply in the face of falling demand from fund managers (who are facing record outflows this year) has pushed spreads and yields to the most attractive levels we have seen in the post-crisis period.
If these spreads and yields are attractive to investors, it usually means that margins for RMBS issuers like Angel Oak are being squeezed. This helps explain part of why Angel Oak Cos. Affiliated REIT, AOMR, which publishes its financial statements, reported a net loss of $43.5 million in the first quarter of the year. The “$2 million in securitization costs” associated with AOMR’s February 2022 PLS offering alone contributed to that loss, Brandon Filson, AOMR’s chief financial officer, said during the company’s first quarter (Q1) earnings call on May 12.
AOMR is part of a family of Angel Oak Cos. which also includes non-QM lenders Angel Oak Home Loans and Angel Oak Mortgage Solutions as well as Angel Oak Capital Advisors.
Non-QM mortgages include loans that cannot order a government, or “agency”, through Fannie Mae or Freddie Mac. The pool of non-QM borrowers includes real estate investors, real estate buyers, foreign nationals, business owners, gig workers and self-employed people, as well as a small group of buyers facing credit problems, such as past bankruptcies.
Because non-QM, or non-prime, mortgages are considered riskier than prime loans, in a normal market they typically command an interest rate about 150 basis points above preferential agency rates.
Additionally, in a rising rate environment, MBS investors expect a premium on securities backed by lower-rate mortgages, relative to deals involving more recent higher-rate mortgages. This creates execution and liquidity issues for lenders looking to liquidate their loan pipelines to pay creditors and create new loans.
“We have three securitizations in 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 conference call with analysts. “…and all of these deals had coupons in the mid to high 4% [range]what you consider to be in the current context of the coupon market.
In fact, according to bond rating documents, the bulk of the loans backing Angel Oak’s five PLS deals to date are seasoned, or aged, between 7.4 and 10.7 months, which means most mortgages were created at the lowest rates in effect last year. . Therefore, Angel Oak’s PLS deals so far this year do not imply significant current production, which would result in rates closer to the current market situation.
Keith Lind, CEO of a non-QM lender Acra loansaid Acra’s mortgage rates have been in the “high 7%” range over the past month, “and there is good liquidity” at that level.
Sinha, on the first quarter earnings call in mid-May, confirmed that a good portion of all loans then on Angel Oak’s balance sheet being readied for securitization “are seasoned between three and six months.
“Our loan portfolio is starting to reflect an increase in coupons [interest rates] in response to the higher rate environment that accelerated at the end of the first quarter,” Filson added during the AOMR earnings call. “The latest rate freezes [as of May 12] on loans from our mortgage affiliates are greater than 7% of the weighted average coupon, approximately 250 basis points higher than our March 2022 loan portfolio.
“The loans we bought in April had a weighted average coupon of 4.9%, and the May purchases so far have a weighted average coupon of 5.4%.”
At the beginning of May, just after the end of the first quarter, Freddie Mac reported that the 30-year fixed-rate mortgage average was 5.27%, down from 5.1% a week earlier. As of July 21, Freddie Mac reports that the interest rate for a 30-year fixed mortgage averaged 5.54%.
“Lower coupon loans have kind of become market orphans,” Lind explained in a recent interview that focused on the overall PLS market, not Angel Oak specifically. “Investors don’t jump to buy bonds backed by [mortgage loans with] coupons so low that loans [in the collateral pools] can’t even cover the coupon on bonds and securitization [costs].
“So I think it’s going to be difficult if people want to securitize this because it doesn’t seem to be very well received by investors in the securitization market.”
Leaders of Angel Oak Cos. declined to be interviewed by HousingWire for this story.
Despite a large volume of low-rate mortgages in its securitization pipeline and the red ink released by the AOMR in the first quarter, Sinha expressed confidence during the first quarter earnings call in the ability of the company to overcome the current liquidity challenges.
“Generally speaking, the loans we bought in the first quarter are still loans that were locked in at the market rate at that time, which was between 4% and 4%. [range]”, Sinha said. “…We had a lot of success in closing these deals, and one of the deals just closed today [May 12] had a very good success in terms of bond investments, et cetera.
“…The current coupon is still the target,” she added. “Now, as rates become volatile and move around, when these loans are eventually securitized, terms can vary. And we hope to capture most of that variation through interest rate hedges.
In addition to hedging, Angel Oak also employs a strategy of mixing low-rate and higher-rate mortgages in its securitization pools.
“We continue to buy current coupon loans from Angel Oak or even outside sellers, mixing them with [lower-rate loans] to create a bit higher coupon pool and execute securitizations over the next six to 12 months to facilitate the securitization process,” Sinha said on the first quarter earnings call in response to a question from the audience. analyst on the practice.
Angel Oak also has another arrow in its quiver when it comes to surviving the current rate crisis. Filson pointed out in AOMR’s first quarter earnings call that as of March 31, the lender had $90.4 million in cash and cash equivalents on its balance sheet, as well as funding facilities aligned with six banks.
“We increased our total committed loan funding capacity by $50 million in the first quarter,” he said. “Our total unused funding capacity was $344 million as of March 31.
“After [after Q1] At the end of the quarter, we added a new $340 million credit facility, bringing our total current capacity to $1.64 billion. This, combined with the increase in our cash balance at the end of the quarter, demonstrates our commitment to a sound liquidity management strategy during this period of rising rates.
AOMR CEO Robert Williams said that despite challenges in the current rate environment, Angel Oak has a strong balance sheet with “abundant liquidity.”
“Our first quarter results were impacted by unrealized market impairments on our balance sheet,” Williams added. “And a lot of that was due to a significant widening of credit spreads. … [but] our portfolio remains solid. We are confident that we can operate in this complex environment, focusing on strong underwriting and strong liquidity. »
Lind stressed that the quality of loans in the non-QM space is not the issue today. “It’s not bad loans, just bad prices,” he said.
AOMR should come out second quarter financial results August 9.