DBRS Assigns Provisional Ratings to Angel Oak Mortgage Trust 2019-3

DBRS, Inc. (DBRS) assigned provisional ratings to the following Mortgage-Backed Certificates, Series 2019-3 (the Certificates) issued by Angel Oak Mortgage Trust 2019-3 (AOMT 2019-3 or the Trust):

-- $227.0 million Class A-1 at AAA (sf)
-- $26.7 million Class A-2 at AA (sf)
-- $53.2 million Class A-3 at A (sf)
-- $31.3 million Class M-1 at BBB (sf)
-- $16.2 million Class B-1 at BB (sf)
-- $16.6 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Certificates reflects 40.45% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 33.45%, 19.50%, 11.30%, 7.05% and 2.70% of credit enhancement, respectively.

Other than the specified classes above, DBRS does not rate any other classes in this transaction.

This transaction is a securitization of a portfolio of primarily first-lien fixed- and adjustable-rate non-prime and prime residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 1,169 loans with a total principal balance of $381,253,566 as of the Cut-Off Date (May 1, 2019).

Angel Oak Home Loans LLC (AOHL), Angel Oak Mortgage Solutions LLC (AOMS) and Angel Oak Prime Bridge LLC (collectively, Angel Oak) originated 100.0% of the portfolio (1,169 loans). The Angel Oak first-lien mortgages were mainly originated under the following eight programs:

(1) Portfolio Select (54.0%) – Made to borrowers with near-prime credit scores who are unable to obtain financing through conventional or governmental channels because (a) they fail to satisfy credit requirements, (b) they are self-employed and need an alternate income calculation using 12 months or 24 months of bank statements to qualify, (c) they may have a credit score that is lower than that required by government-sponsored entity underwriting guidelines or (d) they may have been subject to a bankruptcy or foreclosure 24 or more months prior to origination.

(2) Platinum (26.5%) – Made to borrowers who have prime or near-prime credit scores, but who are unable to obtain financing through conventional or governmental channels because (a) they fail to satisfy credit requirements, (b) they are self-employed and need alternative income calculations using 12 months or 24 months of bank statements or (c) they may have been subject to a bankruptcy or foreclosure 48 or more months prior to origination.

(3) Non-Prime General (9.3%) – Made to borrowers who have not sustained a housing event in the past 24 months, but whose credit reports show multiple 30+-day and/or 60+-day delinquencies on any reported debt in the past 12 months.

(4) Investor Cash Flow (7.3%) – Made to real estate investors who are experienced in purchasing, renting and managing investment properties with an established five-year credit history and at least 24 months of clean housing payment history, but who are unable to obtain financing through conventional or governmental channels because (a) they fail to satisfy the requirements of such programs or (b) may be over the maximum number of properties allowed. Loans originated under the Investor Cash Flow program are considered business-purpose and are not covered by the Ability-to-Repay (ATR) or TILA/RESPA Integrated Disclosure rules.

(5) Non-Prime Recent Housing (1.6%) – Made to borrowers who have completed or have had their properties subject to a short sale, deed in lieu, notice of default or foreclosure. Borrowers who have filed bankruptcy 12 or more months prior to origination or have experienced severe delinquencies may also be considered for this program.

(6) Non-Prime Foreign National (0.8%) – Made to investment property borrowers who are citizens of foreign countries and who do not reside or work in the United States. Borrowers may use alternative income and credit documentation. Income is typically documented by the employer or accountant and credit is verified by letters from overseas credit holders.

(7) Asset Qualifier (0.3%) – Made to borrowers with prime credit and significant assets who can purchase the property with their assets, but choose to use a financing instrument for cash flow purposes. Assets should cover the purchase of the home plus 60 months of debt service and four months of reserves. No income documentation is obtained, but the borrower is qualified based on certain credit requirements (minimum score 700) and significant asset requirements, calculated as 60 times of all monthly debts and new PITIA payments (minimum of $1,300 monthly disposable income). These loans are available within both the Platinum and Portfolio Select programs.

(8) Non-Prime Investment Property (0.2%) – Made to real estate investors who may have financed up to four mortgaged properties with the originators (or 20 mortgaged properties with all lenders).

In addition, the pool contains 0.2% second-lien mortgage loans, which were originated under the guidelines established by the Federal National Mortgage Association and overlaid by Angel Oak.

Select Portfolio Servicing Inc. (SPS) is the Servicer for all loans. AOMS will act as Servicing Administrator and Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Stable trend by DBRS) will act as the Master Servicer. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS) will serve as Trustee and Custodian.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ATR rules, they were made to borrowers who generally do not qualify for agency, government or private-label non-agency prime products for various reasons described above. In accordance with the CFPB Qualified Mortgage (QM) rules, 0.3% of the loans are designated as QM Rebuttable Presumption and 85.4% as non-QM. Approximately 14.3% of the loans are made to investors for business purposes and, thus, are not subject to the QM rules.

The Servicer will generally fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent. The Servicer is obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties.

On or after the two-year anniversary of the Closing Date, the Depositor has the option to purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such purchase, the Depositor then has the option to complete a “qualified liquidation,” which requires a complete liquidation of assets within the trust and proceeds to be distributed to the appropriate holders of regular or residual interests.

The transaction employs a sequential-pay cash flow structure with a pro-rata principal distribution among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Certificates as the outstanding senior Certificates are paid in full. Furthermore, excess spread can be used to cover realized losses first before being allocated to unpaid cap carryover amounts up to Class B-2.

The ratings reflect transactional strengths that include the following:

(1) Improved Underwriting Standards: Whether for prime or non-prime mortgages, underwriting standards have generally improved significantly from the pre-crisis era with respect to certain attributes such as income, asset and employment verification as well as appraisal and reserve requirements. All mortgage loans (except for Investor Cash Flow, Investment Property and Foreign National) were underwritten in accordance with the eight underwriting factors of the ATR rules, although they may not necessarily comply with Appendix Q of Regulation Z.

(2) Robust Loan Attributes and Pool Composition:
-- The mortgage loans in this portfolio generally have robust loan attributes as reflected in the combined loan-to-value (LTV) ratios, borrower household incomes and liquid reserves, including the loans in the Non-Prime programs that have weaker borrower credit.
-- LTV ratios gradually reduce as the programs move down the credit spectrum, suggesting the consideration of compensating factors for riskier pools.
-- The pool comprises 65.4% hybrid adjustable-rate mortgages with an initial fixed period of five to ten years, allowing borrowers sufficient time to credit cure before rates reset. The remaining 34.6% of the pool comprises fixed-rate mortgages, which typically have the lowest default risk because of the stability of monthly payments.

(3) Satisfactory Third-Party Due Diligence Review: Third-party due diligence firms conducted property valuation and credit reviews on 100% of the loans in the pool. For 92.4% of the loans (i.e., the entire pool excluding 89 Investor Cash Flow loans), third-party due diligence firms performed a regulatory compliance review. Data integrity checks were also performed on the pool.

(4) Strong Servicer: SPS, a strong residential mortgage servicer and a wholly owned subsidiary of Credit Suisse AG (rated “A” with a Stable trend by DBRS), services all of the loans (100.0%) in the pool. In this transaction, SPS is responsible for funding advances to the extent required. In addition, the transaction employs Wells Fargo as the Master Servicer. If the Servicers fail in its obligation to make principal and interest advances, Wells Fargo will be obligated to fund such servicing advances.

(5) Current Loans and Faster Prepayments: Angel Oak began originating non-agency loans in Q4 2013. Since the first transaction was issued in December 2015, voluntary prepayment rates have been relatively high as these borrowers tend to credit cure and refinance into lower-cost mortgages. Also, the loans in the AOMT 2019-3 portfolio have been current since origination.

The transaction also includes the following challenges and mitigating factors:

(1) Although slightly stronger than other comparable non-QM transactions rated by DBRS, the representations and warranties (R&W) framework for AOMT 2019-3 is weaker than post-crisis prime securitization frameworks. Instead of an automatic review when a loan becomes seriously delinquent, this transaction employs a mandatory review upon less immediate triggers. In addition, the R&W providers are unrated entities, have limited performance history in non-QM securitizations and may potentially experience financial stress that could result in the inability to fulfill repurchase obligations. DBRS notes the following mitigating factors:

-- Satisfactory third-party due diligence was conducted on 100% of the loans included in the pool with respect to credit, property valuation and data integrity. A regulatory compliance review was performed on all but 89 Investor Cash Flow loans. A comprehensive due diligence review mitigates the risk of future R&W violations.
-- An independent third-party R&W reviewer, Covius Real Estate Services, LLC, is named in the transaction to review loans for alleged breaches of R&W.
-- DBRS conducted an on-site originator review of AOHL and AOMS and deems the mortgage companies to be acceptable.
-- The Sponsor, an affiliate of Angel Oak, will retain an eligible vertical interest in at least 5% of each class’s certificates, aligning sponsor and investor interest in the capital structure.
-- Notwithstanding the above, DBRS adjusted the originator scores downward to account for the potential inability to fulfill repurchase obligations, the lack of performance history as well as the weaker R&W framework. A lower originator score results in increased default and loss assumptions and provides additional cushions for the rated securities.

(2) Non-Prime, QM-Rebuttable Presumption or Non-QM Loans: Compared with post-crisis prime transactions, this portfolio contains mortgages originated to borrowers with weaker credits or prior derogatory credit events as well as QM-rebuttable presumption or non-QM loans. In addition, certain loans were underwritten using 24-month bank statements for income verification (7.1%), 12-month bank statements for income verification (54.3%), assets in lieu of income verification (0.3%) or as Investor Cash Flow loans (7.3%). DBRS notes the following mitigating factors:

-- All loans subject to the ATR rules were originated to meet the eight required underwriting factors.
-- Underwriting standards have improved substantially since the pre-crisis era.
-- Bank statements as income, Investor Cash Flow and Asset Qualifier loans are treated as less-than-full documentation in the RMBS Insight model, which increases expected losses on those loans.
-- The RMBS Insight Model incorporates loss severity penalties for Non-QM and QM Rebuttable Presumption loans as explained further in the Key Loss Severity Drivers section of the related report.
-- For loans in this portfolio that were originated through the Non-Prime General and Non-Prime Recent Housing Event programs, borrower credit events had generally happened 39 months and 12 months, respectively, prior to the cut-off date on average. In its analysis, DBRS applies additional penalties for borrowers with recent credit events within the past two years.

(3) Geographic Concentration: Compared with other recent securitizations, the AOMT 2019-3 pool has a high concentration of loans located in Florida (25.1% of the pool). Mitigating factors include the following:

-- Although the pool is concentrated in Florida, the loans are well dispersed among metropolitan statistical areas (MSAs). The largest Florida MSA, Fort Lauderdale-Pompano Beach-Deerfield Beach, represents only 5.5% of the entire transaction. DBRS does not believe that the AOMT 2019-3 pool is particularly sensitive to any deterioration in economic conditions or to the occurrence of a natural disaster in any specific region.
-- DBRS’s RMBS Insight Model generates an elevated asset correlation for this portfolio as determined by the loan size and geographic concentration, resulting in higher expected losses across all rating categories.

(4) Servicer Advances of Delinquent Principal and Interest: The related Servicer will advance scheduled principal and interest on delinquent mortgages until such loans become 180 days delinquent or until such advances are deemed unrecoverable. This will likely result in lower loss severities to the transaction because advanced principal and interest will not have to be reimbursed from the Trust upon the liquidation of the mortgages, but will increase the possibility of periodic interest shortfalls to the Certificateholders. Mitigating factors include the fact that (a) principal proceeds can be used to pay interest shortfalls to the Certificates as the outstanding senior Certificates are paid in full and (b) subordination levels are greater than expected losses, which may provide for payment of interest to the Certificates. DBRS ran cash flow scenarios that incorporated principal and interest advancing up to 180 days for delinquent loans; the cash flow scenarios are discussed in more detail in the Cash Flow Analysis section of the related report.

The DBRS ratings of AAA (sf) and AA (sf) address the timely payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Certificates. The DBRS ratings of A (sf), BBB (sf), BB (sf) and B (sf) address the ultimate payment of interest and full payment of principal by the legal final maturity date in accordance with the terms and conditions of the related Certificates.

The full description of the strengths, challenges and mitigating factors are detailed in the related report.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link below under Related Research or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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