The past year has been particularly successful for the mortgage lending industry. The COVID-19 pandemic has sparked aggressive action by the Federal Reserve, which has cut base interest rates to zero and resumed purchases of securities backed by bonds and mortgages. The mortgage banking industry has had its best year since 2003, with a slew of mortgage originators taking advantage of the favorable times and going public.
The last mortgage bank to go public – Angel Oak mortgage (NYSE: AOMR)… His business model is different from that of most other government mortgage banks, so it’s worth understanding what he does.
Unqualified mortgage is slightly different
Angel Oak is a real estate finance company that specializes in providing unqualified (non-QM) mortgages. These loans are different from typical mortgages issued by companies such as Rocket or UWM Holdings… These companies focus on loans guaranteed by the US government. Non-quality control loans have characteristics that make them unsuitable for a government guarantee. The most common reason for disqualification is the borrower’s income. Some self-employed borrowers may find that their tax returns underestimate their income. Others want to rely entirely on rental income to pay their mortgage payments. Since these loans are not guaranteed by the government, the lender is exposed to credit risk.
It is important to understand that these non-QM loans have nothing to do with the subprime loans that went bad during the 2007-2008 financial crisis. These loans were inaccurately guaranteed and lenders were optimistic about the credit risk as the value of the underlying real estate rose steadily. In fact, the loan officers were responsible for the appraisal, which is now prohibited. If the borrower got into trouble, the loan was considered “good for the money” as long as property prices rose because the value of the house would cover the loan.
Today’s non-QM loans still have strict underwriting rules; however, they are flexible enough to accommodate borrowers who go beyond government credit limits. In addition, these loans usually require the borrower to make a significant down payment. At the time of Angel Oak’s IPO, his non-QM portfolio had an average credit rating of 715, an average credit-to-value ratio of 76%, and an average down payment of over $ 100,000.
Fannie Mae and Freddie Mac reduce their presence
Angel Oak provided $ 1.5 billion in non-QM loans in 2020 and $ 516 million this year through March 31. Angel Oak acquires the vast majority of its loans through its wholesale channel, where it buys loans from independent mortgage bankers. The rest is through our own retail channel.
Angel Oak notes in her prospectus that private label loans (in other words, not guaranteed by the government) accounted for about 11% of the total until the real estate bubble from 2004 to 2007, where they accounted for 39% in 2006. These loans more or less disappeared after 2007 and have not accounted for more than 3% of the total since then. The government restricted the types of loans that could be sold until Fannie Mae as well as Freddie Mac, and this volume will go to the market without QM.
This is the growth opportunity that Angel Oak focuses on. Instead of trying to navigate price war between companies like Rocket and United Wholesale, he focuses on non-QM, where there is less competition.
Angel oak looks pretty inexpensive, but worth a look
Angel Oak earned $ 0.05 a share last year. However, like most lenders, it had a terrible first quarter when the COVID-19 pandemic began. If you look at stocks on a rolling 12-month basis, they earned $ 2.98 per share in the 12 months ended the first quarter of this year. This gives the stock a moving price-to-earnings (PE) ratio of 6, which is correct for a mortgage banker these days. Angel oak also real estate investment fund (REIT), which means he is likely to pay dividend soon enough.
Angel Oak looks pretty priced at the moment. However, if the non-QM market starts to pick up steam, it will likely win as the rest of the players spend it on a piece of the slower growing pie.
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