Non-prime mortgage products have been slowly creeping into the market for the last four years, but total volume still pales in comparison to traditional agency mortgages. One of the headwinds for non-prime mortgages has been wave after wave of refinancing. Loan originators have little incentive to adapt new products when they can simply rely on refi volume. We’ve hypothesized in past commentaries that the refi spigot would soon shut off, but we are continuously surprised by lower rates. Still, we’d be shocked if we saw negative rates on mortgages at any point in the future.
On the other hand, non-prime has experienced a tailwind from robust investor demand, which is beneficial to lenders that need to free up capital or remove risk from their books. This is done through the residential mortgage-backed security (RMBS) vehicle. Investor demand for non-prime RMBS is growing faster than the securitizing agents can create the bonds. This upstream demand is critical as it lets purchasers of loans know that the market is there for them to increase securitization volume.
Eventually, the pace of non-prime securitizations will catch up with both demand from investors and the supply of loans on the market. The question is will lenders be able to keep up with demand once we reach that point? Our view is that, by the time securitizations catch up, the majority of refinancing volume will be behind us and lenders will have no choice but to expand their portfolio to include non-prime products.
The non-prime mortgage market has seen steady growth even with the aforementioned obstacles. Angel Oak Mortgage Solutions has originated about 2,500 loans since inception. About half of our loans have been securitized, with the latest batch bundled in the Angel Oak Mortgage Trust 2016-1 in mid-August.
Now that the link between investors and borrowers has been completed and proven to be successful, volume should start to really pick up. The aforementioned securitization is the seventh non-prime deal in the last year. Furthermore, as these deals start to get rated, investor acceptance and accessibility will expand even further. Rated transactions reduce the cost of capital because people are willing to take a lower rate of return given the lower risk factor.
Though we are still nowhere close to volumes seen before the housing crisis, the securitization of non-prime loans is a sign that momentum is heading in the right direction. The reemergence of these deals demonstrates that Wall Street, private equity and the non-prime mortgage market are back at the table together again and paints a positive outlook for mortgage liquidity.
Tom Hutchens is senior vice president of sales and marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale lender currently licensed in 32 states. Tom has been in the real estate lending business for nearly 20 years. He may be reached by phone at (855) 539-4910 or e-mail [email protected].
This article originally appeared in the September 2016 print edition of National Mortgage Professional Magazine.
