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Angel Oak Private Strategies: Non-Agency Market Update and Outlook

A Record Year for a Scalable Asset Class

On the heels of the largest year ever for Non-QM securitization issuance, expectations are for robust volume in 2025, with market consensus (BAML, Morgan Stanley, and Nomura Research) forecasting issuance volumes to exceed last year’s. As more investors clamor for asset-based finance and strategies that are adjacent to corporate-backed private credit, our argument for residential credit as a scalable alternative seems to be well supported with data.

There are several driving factors behind the increased issuance, in our view. Strong growth in the borrower segments catered to by Non-QM, as shown in the charts below, is a key part of the story. In addition, mortgage originators viewing Non-Agency as a necessary, integral part of their business with sluggish Agency volumes is another reason. A more balanced market between end accounts looking to own whole loans and securitization issuance is yet another positive development for the market. Lastly, the emergence of closed-end second liens and home equity lines of credit (HELOCs) has also triggered another leg of growth outside of more traditional Non-QM collateral. With a changing administration in 2025, there is potential for more volume to emerge in the Non-Agency market with a scaled-back or reduced footprint by the Agencies. Agency-eligible mortgages for investment properties (Agency investor) are a prime example of this. These mortgages are originated within Agency guidelines using standard documentation, but the Non-Agency market potentially offers better pricing for mortgage origination companies as compared to Fannie and Freddie.

In 2024, Bank Statement and Investor (DSCR) mortgages continued to make up the majority of Non-QM. It’s no surprise that these two segments make up the primary components of the Non-Agency mortgage market. There are over 33 million small businesses in the U.S., and the number of these firms has continued to grow over the past decade. The number of business applications has surged since 2020, with 2023 the largest year on record at 5.5 million. Through November 2024, there have been 4.8 million new business applications. Bank Statement loans cater to this growing segment of borrowers. Investor loans have also seen significant growth in recent years as mortgage rates have increased. The lock-in effect from homeowners having low mortgage rates has created the incentive to rent out properties, as opposed to selling. Housing turnover is sitting at 40-year lows given the wide gap between current rates and the rate on outstanding mortgages. Affordability for new home purchasers has been challenged and driven demand for rental properties.

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