Asset-based investing has seen significant interest in recent months, with private credit managers, insurance companies, and other investors looking for the “new frontier” away from corporate private credit and focusing on areas with contractual cash flows and hard assets. The Angel Oak platform that allows investors to participate in securitizations and own mortgages in whole loan form is a leader in providing investors access to this growing asset class. Credit performance in the Non-Agency residential mortgage sector has been noteworthy post-GFC. In this paper, we do a deeper dive into credit performance in the sector and highlight Angel Oak’s performance.
Key Takeaways
- The Non-Agency borrower base continues to expand, with record growth in small business formation providing a tailwind for investors with an imbalance of credit availability relative to the borrower base.
- Delinquencies for Non-Agency residential mortgages relative to other sectors, including autos, corporates, and commercial real estate, continue to be low. The percentage of borrowers in foreclosure remains just 1% of the current outstanding balance of mortgages in the Non-QM sector.
- Angel Oak’s performance relative to the competition stands out with lower delinquencies as shown in this report. The ability to source mortgages through a leading affiliate wholesale originator and third parties allows Angel Oak to build carefully curated diversified portfolios. A sourcing advantage for the firm is coupled with industry-leading proprietary analytics in order to minimize delinquencies.
Residential Mortgages: A Safe Haven
As delinquencies have increased in the past three years across areas of credit including high-yield corporates, commercial real estate, and the consumer credit markets including autos, the residential mortgage market has stood out as a top performer. The 60+ day delinquency rate on Non-QM has increased to approximately 3%, whereas other areas of credit — such as subprime auto, which has increased to almost 8%; SASB CMBS at 4.3%; and conduit CMBS at 5.6% — have seen delinquencies accelerate much more sharply. According to Fitch, the 12-month leveraged loan default rate was 4.47% in August. Tightening credit conditions have led to an increase in delinquencies across a range of credit sectors, with arguably the worst yet to come in areas such as commercial real estate, where developers are holding out hope for swift Fed rate cuts.
So, what’s the secret behind the relative outperformance of Non-QM or Non-Agency mortgage credit? Certainly, the macro factors have been supportive with robust employment levels and tailwinds specific to the Non-Agency borrower base. Small business formation continues to accelerate, allowing for a favorable supply/demand dynamic with limited mortgage credit availability for these borrowers. As shown in the charts below, the borrower base continues to expand, with limited competitive pressures that would traditionally erode credit standards over time. We would argue that all these aspects have been supportive, but an element of active management has also played a role in navigating credit performance specific to the Angel Oak lending and investing platform. Adjustments to the credit box in anticipation of tougher times ahead were a key component of Angel Oak’s industry-leading credit performance in the Non-QM sector since 2022. Recognizing the turning point in the housing market from a one-way market with price appreciation throughout the country to one that is much more balanced, with some local areas doing better than others, was also a key aspect of differentiated performance.
This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for informational purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Angel Oak Capital Advisors or consult with the professional advisor of their choosing.
The views expressed represent the opinion of Angel Oak Capital Advisors which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While Angel Oak Capital Advisors believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimate, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance, or events may differ materially from those expressed or implied in such statements.
Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future. Except where otherwise indicated, the information contained in this presentation is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution or any future date. Recipients should not rely solely on this material in making any future investment decision.
Past performance is no guarantee of future returns. No guarantee of investment performance is being provided and no inference to the contrary should be made.