A major private financial institution has fallen into distress due to defaults on mortgage payments on home resale businesses.
The U.S. Securities and Exchange Commission on Wednesday fined Atlanta-based Angel Oak Capital Advisors $1.75 million for concealing deteriorating loan quality in a 2018 bond deal.
That year, Angel Oak raised $90 million by bundling its affiliates' loans into a portfolio and selling the proceeds to investors in a process known as securitization. But shortly after the deal closed, delinquency rates on those loans unexpectedly rose, according to the SEC.
The SEC said that instead of returning some of the investors' money, as required by the terms of the agreements, Angel Oak used other funds to repay the outstanding loan balances, which made the loans appear to investors to be performing better than they actually were, allowing Angel Oak to continue issuing larger securitizations.
The $75 billion-a-year home-flipping industry has come to rely heavily on securitization to keep money flowing from big investors to private lenders and from the lenders to individual home flippers. A key part of the equation is how much confidence investors have in these loans.
Angel Oak agreed to the fines as part of the settlement, which also included a $75,000 penalty against the firm's senior portfolio manager, Ashish Negundi.
“Angel Oak Capital Advisors is neither admitting nor denying the findings, but accepts the SEC's ruling regarding the 2018 fix-and-flip mortgage securitizations,” a company spokesperson said. “Angel Oak's affiliated mortgage companies have not originated these loans since 2019, and all senior creditors in the securitizations have received full payments of principal and interest.”
Fix-and-flip securitizations have become much harder to issue over the past few months, but that's not necessarily down to a lack of investor confidence in the underlying loans. Lenders issued many of the loans on their balance sheets earlier this year, when interest rates were much lower. Those loans are hard to unload because bond buyers are now demanding higher yields to compensate for rising interest rates.
In response, private lenders are tightening their lending standards and charging higher interest rates on short-term loans to flippers, meaning times are tough if they're just starting out and have little cash on hand.