The appetite for riskier mortgages is rising, and a small cadre of investment firms is ready to feed it. More The appetite for riskier mortgages i
The number of nonprime mortgage-backed securities “skyrocketed” in the second quarter of this year, according to Inside Mortgage Finance — a total of $1.08 billion of MBS backed by nonprime home loans. That was the strongest quarter for the sector since the financial crisis. It is still, however, nothing compared with the volume that caused the housing crash.
“At one point during the housing boom, we had a third of all mortgage originations that were nonprime [subprime or Alt-A, the latter having low or no documentation]. 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,” said Guy Cecala, CEO of Inside Mortgage Finance.
That is because while investors are hungry for yield, they are still very skeptical. The ratings agencies are as well. That makes it difficult for companies like Angel Oak, and its competitors — Lone Star and Deephaven Mortgage — to issue large quantities of nonprime MBS.
Nonprime securitizations today are far less risky, consisting of loans that were underwritten far more stringently. Angel Oaks’ securitization does consist of both fixed- and floating-rate loans.
“In addition to borrowers that had prior credit events, our loans are also for borrowers who are self-employed,” said Lauren Hedvat, capital markets director at Angel Oak. “They are of high credit quality, but they are not able to access mortgage products by the more traditional bank routes.”
“The nonprime loans being made today probably wouldn’t even be considered nonprime leading up to the housing bust,” said Cecala. “What makes them nonprime 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.”
This is Angel Oak’s fourth securitization since 2015 but only the second rated deal. With the AAA rating comes more investor demand. Both banks and insurance companies only invest in rated securities, and these offer considerably higher yields than government-backed loans. Angel Oak’s borrowers are paying interest rates of between 5 and 9 percent, while the average rate on the 30-year fixed conforming mortgage is just above 4 percent.
“We’re seeing very strong demand from investors and oversubscription to the transactions because at this point it’s a limited supply,” said Hedvat. “We have stronger underwriting standards and guidelines so the credit quality is strong. You get a good yielding asset. Banks require ratings, so now that we have a more rated environment, we’re seeing demand increase from those investors as well.”
Angel Oak does plan more of these securitizations, perhaps as soon as this fall.
“We’re looking to be a consistent issuer in the market, to do multiple transactions per year,” added Hedvat.