Appetite for Non Prime Mortgages Increasing


Angel Oak Capital Advisors announces a more than $210 million deal on rated securitization of non prime residential mortgages and suddenly, it feels like 2006 again.

Investor appetite for risky mortgages is back and Angel Oak Capital’s latest deal is proof of that. Just recently, Angel Oak Capital Advisors announced its second rated securitization of non prime residential mortgages for the year. The deal, which reached $210 million is considered the company’s largest so far. The deal was reported to be initially less and only grew as demand from investors and borrowers alike also increased, allowing securitizations to build on this growth.

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Private-label mortgage-backed securities (MBS) are securitized mortgages that do not conform to the criteria set by the Government Sponsored Enterprises Freddie Mac, Fannie Mae and Ginnie Mae. The loans that make up these securities aren’t insured so they carry a significant risk. These are the same loans that are to blame for the mortgage crisis in 2008. Angel Oak is one of the few companies who offer these kinds of securities.

Given the fresh impact of the past crisis, this increase in risky securities raises eyebrows. But are these loans really the same as their predecessors?

NonQMs Today

After the housing collapse, the government established rules ensuring that only financially capable individuals can take out a mortgage. In the years that followed, lenders saw to it that they observe a borrower’s ability to repay. Generally, borrowers with scores lower than the standard minimum, have unconventional income setups, low documentation issues and negative equity are turned down, leaving them with few options but to commit to nonqualified mortgages.

NonQMs typically have higher interest rates on top of lenient qualifications. They are also not backed by the GSEs. For years, investors remained reluctant to touch such risky investments. But Angel Oak’s current data shows that that stopped being the case.

The number of these private-label MBS has jumped to the roof in just the Q2 of 2017, totalling $1.08 billion, the strongest quarter charted since the crisis.

“At one point during the housing boom, we had a third of all mortgage originations that were non prime [subprime or Alt-A, the latter having low or no documentation],” says Inside Mortgage Finance CEO Guy Cecala. “We’re not going to be even 5 percent of the market if we have a record year this year. It still has a long, long way to go.”

Why the shift?

The preferential shift may be attributed to the quality of non prime securitizations today. Experts are saying that these new brands of loans are less risky than those that drove the crisis. Despite bypassing certain requirements for a qualified mortgage rule, lenders still require their clients to demonstrate their ability to repay.

“The non prime loans being made today probably wouldn’t even be considered non prime leading up to the housing bust,” adds Cecala. “What makes them non prime is perhaps the credit score of a borrower or financial problems the borrower had in the past, but they generally have large down payments or big assets behind them.”

These loans are usually directed to self-employed borrowers, those who are earning commissions, those who had previous credit events but need immediate financing, etc.

The company is looking at doing multiple transactions annually as it plans to be a consistent issuer in the market.

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