In this insurance investment whitepaper, Angel Oak’s Institutional Client Group highlights the influx of U.S. life insurance companies investing in residential mortgage loans and provides a market update on non-qualified loans.
Key Takeaways
- U.S. life insurance companies have more than doubled their residential mortgage loan (RML) holdings over the past four years, now making up 2% of life insurers’ total aggregate investment portfolios.
- The demand for RMLs has been driven by the significant growth in annuity sales, the 68 basis points (bps) NAIC risk-based capital charge (RBC) they receive, comparable to a single-A-rated bond, and the attractive yield per unit of RBC. Insurance companies can also obtain Federal Home Loan Bank (FHLB) financing to further enhance potential returns.
- Given the attractive return profile and credit characteristics, Non-QM has been particularly attractive for insurers. Compared to Agency mortgage origination volumes, which drastically dropped as rates increased in 2022, Non-QM origination volumes have remained robust.
- Key drivers of performance are default losses and prepayments on the Non-QM mortgages. Credit losses on Non-QM loans have been minimal, with only a 0.02% cumulative loss across the $150 billion of loans securitized since 2018.
- The spread between Non-QM rates and Agency mortgage rates is one of the key factors in determining expected prepayment rates, and recent mortgages are being originated at historically tight spreads to Agencies (~100 bps). We believe a scenario of slower-than-expected prepayment speeds on current Non-QM origination is likely if the spread to Agencies remains tight.
Market Overview
Through July, year-to-date Non-Agency RMBS issuance in the U.S. was $73 billion, with the largest volume coming from Non-QM at $24.6 billion YTD. Weighted average coupons (WAC) in Non-QM deals are now as high as 9%, and appetite for fixed-rate mortgage credit continues to drive oversubscription levels on new issuance as investors look to deploy capital. Non-QM AAA spreads have tightened over the past year from their oneyear high of 195, down to 135 in July. In 2024, many off-the-run deals, such as second liens, home equity lines of credit (HELOCs), and reverse mortgages, have started gaining traction.
Non-QM is composed of several product or documentation types, including Bank Statement, Investor, Full Doc, CPA, and Asset Qualifier. Investor loans are designed for real estate investors using funds for a rental property, for which DSCR and borrower credit characteristics are used to qualify a borrower. Bank Statement loans are designed for self-employed business owners, using alternative income calculations to qualify. These two documentation types make up the majority of Non-QM, with YTD issuance consisting of 44% Investor and 36% Bank Statement loans. Since 2017, the collateral quality has substantially improved on these loans, with an average 740 FICO, 70% LTV, and only 15% adjustable-rate mortgages (compared to 80% ARMs in 2017).
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