Angel Oak prepares for increase in non-QM borrowers after pandemic

Company strategizes for "Angel Oak 2.0"

As the coronavirus pandemic took root in this country, Atlanta-headquartered Angel Oak Mortgage Solutions found its non-QM lending business on shaky ground. On March 19, the company stated that it would continue lending, but with adjusted rates and guidelines. On March 22, however, another announcement was issued.

“The pandemic has continued to cause turmoil in the worldwide economy,” Angel Oak said in its note to clients. “Due to the constant shifts and the inability to appropriately evaluate credit risk, we are pausing all loan activity for two weeks. This includes fundings and any new loan activity.”

While the pandemic has yet to abate and the national economy is still some distance from its pre-crisis state, Angel Oak is back in the non-QM business, with a full-speed-ahead game plan.

“We’re calling it Angel Oak 2.0,” said Tom Hutchens, executive vice president of production. “Investors are still interested. In fact, our affiliate Angel Oak Capital just issued a securitization a couple of weeks ago of the pre-pandemic loans – and it was oversubscribed. I think it speaks a lot to the trust and the faith that they have in Angel Oak as an originator.”

The transaction Hutchens cited was AOMT 2020-2, a $346 million securitization composed of non-QM loans primarily originated by Angel Oak Mortgage Solutions and Angel Oak Home Loans. The senior tranche of AOMT 2020-2 received a AAA rating from Fitch, he added. This was the company’s second securitization this year.

While Hutchens acknowledged the early stages of the pandemic’s impact on the economy was difficult, he stressed the problem was not a reflection on his company but on how the non-QM sector operates.

“I think it’s important to understand what happened with this pandemic,” he said. “Non-QM is not government guaranteed – it is all about private capital, with private investors coming into the securitization process by investing in non-agency loans. What happened in March was this: as soon as the states began to shut down businesses, our ability to determine the credit risk of a borrower and, most importantly, their ability to repay went away overnight. So that’s really why it became rough – we don’t have a government guarantee.”

Hutchens noted that Freddie Mac and Fannie Mae were still covering loans during those weeks, even if the loans would prove to be problematic, but the non-QM lenders lacked the safety net of government guarantees.

“It was not just us, but the industry had to take a pause until the country got back to work,” Hutchens added.

In the aftermath of its pause on lending, Angel Oak returned to the space with an April 27 soft launch of a 24-month business bank statement product and a full documentation jumbo product.

“We are continuing to assess the financial landscape,” Hutchens said. “We will be looking to make adjustments to our current products and add new ones as we believe makes sense given the state of the market.”

Angel Oak has focused exclusively on the non-QM space since its founding, Hutchens continued, and he stressed that its activities affirm the viability of these products.

“We’ve had a really, really solid track record,” he said. “We’ve securitized over $6 billion of non-QM-only loans, and the performance of those loans speak for themselves. And being able to issue a securitization while we were still in the midst of the pandemic with pre-pandemic originations, I think, speaks a lot to investor confidence in Angel Oak.”

Angel Oak is still originating and closing new non-QM loans, Hutchens added, and he predicted the company will have more competition in the near future as the economy regains its vibrancy.

“It’s proved to be a great market,” he said. “There were a lot of originators and a lot of wholesale and correspondent lenders in the space, with everyone having a lot of success. It can be a lot more difficult to originate than a government loan for a wholesale lender or correspondent lender – there just a lot of moving parts and it’s not driven by technology.”

But even if new competition doesn’t show up, Hutchens forecast an endless supply of non-QM borrowers in need of these products.

“There are always going to be qualified borrowers that do not fit the tight agency and government guidelines,” he observed. “Those borrowers didn’t go away because of COVID-19.”

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