Alternative mortgages will present investors a $150 billion minimum choice versus agency product in 2017, even if the overall origination market declines, according to one executive whose firm is starting to securitize non-QM loans.
Jamie Bellingham, regional sales manager for Angel Oak Mortgage Solutions, told the recent Regional Conference of Mortgage Bankers Associations in Atlantic City that alternative product has been 10-15 percent of the market in recent years. So even if the Mortgage Bankers Association’s most recent prediction of a falloff to $1.5 trillion in mortgage volume this year comes true, that means non-agency will be at least $150 billion.
That’s a lot of collateral for potential securitizations. Bellingham’s Atlanta-based firm has brought three non-agency securitizations to market since December 2015, with the most recent all-non-QM one of $146 million earning an AAA rating from DBRS for a class of $78.1 million of the total. The two earlier securitizations featured a mix of non-QM and jumbo mortgages.
“Securitizations will heighten the demand for non-agency originations,” he told the meeting.
There are still lots of borrowers that non-QM (but still fulfilling ATR requirements) loans make sense for, he said. There are many people with credit scores below 620, for instance, and as of 2015, there were 15 million self-employed workers.
Non-agency mortgages can provide more options for borrowers, he said. And for lenders, more options can mean more referral traffic from a wide variety of sources. Those new borrowers can be referred by Realtors, home builders, lead generation providers, other loan officers, accountants, financial advisers and even bankruptcy attorneys.
Alternative products can provide “an extra tool to have in your bag” for these referral sources, he said.
For the investor side, he noted that Angel Oak’s most recent securitization was oversubscribed. “There are people that want these products,” he said.
It is interesting to take a deep dive into a non-QM securitization as there have not been all that many of them (for years, jumbo MBS made up just about all of the non-agency MBS, and there were not many of them, either.) The analysis provided some qualifications about the MBS as well as positive marks.
More than $78 million of the Angel Oaks Class A-1 certificates were rated AAA (sf) by DBRS, reflecting a 46.65 percent credit enhancement by subordinate certificates in the pool.
In addition, $19.3 million in Class A-2 certificates were rated AA (low) (sf), $20 million received an A rating (low) (sf), $9.4 million got a rating of BBB (low) (sf), $7.5 million were rated BB (low) (sf), and $5.6 million came in at B (sf). There were 529 loans backing these pools.
The rating agency noted that Angel Oak Mortgage Solutions LLC, Angel Oak Home Loans LLC and Angel Oak Prime Bridge LLC are the originators for 70.9%, 26.9% and 2.2% of the portfolio, respectively. Select Portfolio Servicing is servicing the loans, with Wells Fargo as master servicer.
Bellingham discussed the categories of borrowers in the securitization at the Atlantic City meeting, and DBRS also broke them out in its rating analysis. The categories were Portfolio Select (74.2 percent), Non-Prime General (6.4 percent), Non-Prime Recent Housing (6.5 percent), Non-Prime Foreign National (6.3 percent), Non-Prime Investment Property (70 basis points), and Investor Cash Flow (5.9 percent).
To get a feeling for the type of loans in the mix it is interesting to look at the category descriptions. By far the biggest category is the Portfolio Select. DBRS described these loans as “made to borrowers with near-prime credit scores who are unable to obtain financing through conventional or governmental channels because (1) they fail to satisfy credit requirements; (2) they are self-employed and need an alternate income calculation using 24 months of bank statements to qualify; (3) they may have a credit score that is lower than that required by government-sponsored entity underwriting guidelines; or (4) they may have been subject to a bankruptcy or foreclosure 24 or more months prior to origination.”
DBRS noted “Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau ATR rules, they were made to borrowers who generally do not qualify for agency, government or private label non-agency prime jumbo products for various reasons. In accordance with the CFPB Qualified Mortgage (QM) rules, none of the loans are designated as QM Safe Harbor, 5% as QM Rebuttable Presumption and 79.1% as non-QM. Approximately 16% of the loans are for investment properties and thus not subject to the QM rules.”
The rating agency gave Angel Oak a thumbs-up for the following factors: strong underwriting standards, robust loan attributes and pool composition, satisfactory third-party due diligence, satisfactory loan performance to date, and a strong servicer.
However, it noted that the loan performance is based on a rather short experience. “Angel Oak began originating non-agency loans in the fourth quarter of 2013. Of the approximately 1,644 mortgages originated, 12 were over 30 days delinquent, one loan has been 60 days delinquent, four loans 90 days delinquent and six loans 120+ days delinquent. In addition, voluntary prepayment rates have been relatively high in previous Angel Oak securitizations, as these borrowers tend to credit cure and refinance into lower-cost mortgages.”
And it ticked off a couple of challenges and mitigating factors, as well. These include geographic concentration, the representations and warranties framework and provider, and servicer advances on delinquent principal and interest.
Many of the loans are in Florida, DBRS noted, a total of 37.3 percent. But it also said there was a wide dispersal of loans among the various Florida metropolitan statistical areas (MSAs).
As to the reps and warrants issue, DBRS said “Although slightly stronger than other comparable non-QM transactions rated by DBRS, the R&W framework for AOMT 2017-1 is weaker compared with post-crisis prime jumbo securitization frameworks.”
As far as servicer advances go, the rating agency said “The servicing administrator or servicer will advance scheduled principal and interest on delinquent mortgages until such loans become 180 days’ delinquent. This will likely result in lower loss severities to the transaction because advanced principal and interest will not have to be reimbursed from the trust upon the liquidation of the mortgages but will increase the possibility of periodic interest shortfalls to the certificate holders.”
The other two securitizations Angel Oak has done are a $132.7 million non-agency offering in December of 2016 and a $150 million offering of non-prime mortgages in December 2015.