Angel Oak, American Homes Fuel Revival of Riskier Mortgage Debt

Angel Oak Capital and a fund backed by American Homes 4 Rent sold mortgage-backed securities this week that are part of a mini-resurgence of bonds tied to riskier home loans.

Angel Oak sold $135 million of such securities on Thursday, according to a person with knowledge of the transaction who asked not to be identified because the matter is private. The 2.3-year notes, placed by Nomura Holdings Inc., pay an initial 4.5 percent coupon, according to deal documents. They’re tied to so-called non-prime mortgages made to borrowers with weak credit profiles, making it difficult for them to qualify for government-backed loans.

Loan fund Residential Credit Opportunities, managed by a joint venture including American Homes and Beach Point Capital Management, sold about $45 million in bonds tied to similar non-prime mortgages, according to three people familiar with that deal. The transaction, also arranged by Nomura, was sold to yield 3.5 percentage points more than the London interbank offered rate, the person said. Libor was set at 0.5 percentage point on Thursday, according to data compiled by Bloomberg.

Lone Star Funds

The bond deals are among Wall Street’s first offerings of riskier mortgage bonds sold since the 2008 financial crisis. Lone Star Funds issued its second such deal last week after kicking off the market’s resurrection in August. The mortgages backing the securities aren’t quite as risky as the so-called subprime loans that helped inflate the U.S. housing bubble a decade ago.

Freddy Martino, an Angel Oak spokesman at Gregory FCA, declined to comment. Nomura spokesman Jonathan Hodgkinson and Beach Point representative Larry Goldman did not immediately return messages left seeking comment. A message left for the American Homes 4 Rent media department was not returned.

The transactions signal that Wall Street will move more of the debt into investors’ hands if lenders can come up with more supply. Since the crisis, the only new loans financed this way were plain-vanilla mortgages to higher-income borrowers.

Barclays Plc expects around $5 billion in such offerings tied to mortgages made outside regulatory guidelines to be sold next year, it said in a year-ahead outlook published Nov. 18. A portion of those sales is expected to be non-prime.

Loan Pool

The loan pool backing the Angel Oak transaction includes 555 new mortgages to borrowers with average credit scores of 683 and loan values of around 75 percent of the appraised home price, according to the documents. Some 87 percent of the mortgages don’t qualify for government protections that guard against borrower recourse if mistakes are found in the lenders’ underwriting. Borrowers in the deal are paying an average 7.5 percent rate on their mortgages. Half of them live in Florida, the documents show.

The deal is known as Angel Oak Mortgage Trust 2015-1.

Other investors expressing interest in riskier new mortgage debt over the past year have included money managers Western Asset Management Co. and DoubleLine Capital, real estate investment trust Two Harbors Investment Corp. and investment firms Seer Capital Management and Ellington Financial LLC.

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