Fitch Assigns Expected Ratings to Angel Oak Mortgage Trust 2023-1 | MarketScreener

Fitch Ratings has assigned expected ratings to Angel Oak Mortgage Trust 2023-1 (AOMT 2023-1).

RATING ACTIONS

Entity / Debt

Rating

AOMT 2023-1

A-1

LT

AAA(EXP)sf

Expected Rating

A-2

LT

AA(EXP)sf

Expected Rating

A-3

LT

A(EXP)sf

Expected Rating

M-1

LT

BBB-(EXP)sf

Expected Rating

B-1

LT

BB(EXP)sf

Expected Rating

B-2

LT

B(EXP)sf

Expected Rating

B-3

LT

NR(EXP)sf

Expected Rating

A-IO-S

LT

NR(EXP)sf

Expected Rating

XS

LT

NR(EXP)sf

Expected Rating

Page

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VIEW ADDITIONAL RATING DETAILS

Transaction Summary

Fitch expects to rate the RMBS to be issued by Angel Oak Mortgage Trust 2023-1, Series 2023-1 (AOMT 2023-1), as indicated above. The certificates are supported by 1,073 loans with a balance of $580.47 million as of the cutoff date. This represents the 27th Fitch-rated AOMT transaction and the first Fitch-rated AOMT transaction in 2023.

The certificates are secured by mortgage loans mainly originated by Angel Oak Mortgage Solutions LLC (AOMS) and Angel Oak Home Loans LLC (AOHL). All other originators make up less than 10% of the loan pool. Of the loans, 67.4% are designated as nonqualified mortgage (non-QM) loans, and 32.6% are investment properties not subject to the Ability to Repay (ATR) Rule.

There is Libor exposure in this transaction, as there are three ARM loans that reference Libor, although the bonds do not have Libor exposure. Class A-1, A-2 and A-3 certificates are fixed rate, capped at the net weighted average coupon (WAC), and have a step-up feature. Class M-1, B-1 and B-3 certificates are based on the net WAC; class B-2 certificates are based on the net WAC but have a stepdown feature whereby the class becomes a principal-only bond at the point the class A-1, A-2 and A-3 step-up coupons take place. In addition, at the point the class A-1, A-2, and A-3 step-up coupons take place, the waterfall will prioritize the payment to the A-1, A-2, and/or A-3 cap carryover amounts prior to paying B-3.

KEY RATING DRIVERS

Updated Sustainable Home Prices (Negative): Due to Fitch’s updated view on sustainable home prices, Fitch views the home price values of this pool as 8.1% above a long-term sustainable level (vs. 10.5% on a national level as of January 2023, down 1.7% since last quarter). Underlying fundamentals are not keeping pace with the growth in prices, resulting from a supply/demand imbalance driven by low inventory, favorable mortgage rates, and new buyers entering the market. These trends have led to significant home price increases over the past year, with home prices rising 9.2% YoY nationally as of October 2022.

Non-QM Credit Quality (Mixed): The collateral consists of 1,073 loans totaling $580.47 million and seasoned at approximately 12 months in aggregate, according to Fitch, and 10 months, per the transaction documents.

The borrowers have a strong credit profile (736 FICO and 40.3% debt-to-income (DTI) ratio, as determined by Fitch), along with relatively moderate leverage, with an original combined loan to value (CLTV) ratio of 71.2%, as determined by Fitch, which translates to a Fitch-calculated sustainable LTV (sLTV) of 71.5%.

Of the pool, 65.8% represents loans whereby the borrower maintains a primary or secondary residence, while the remaining 34.2% comprises investor properties based on Fitch’s analysis. Fitch determined that 18.4% of the loans were originated through a retail channel.

Additionally, 67.4% are designated as non-QM, while the remaining 32.6% are exempt from QM status since they are investor loans.

The pool contains 128 loans over $1.0 million, with the largest amounting to $3.5 million.

Loans on investor properties (11.0% underwritten to the borrower’s credit profile and 23.2% comprising investor cash flow and no ratio loans) represent 34.2% of the pool, as determined by Fitch. There are no second lien loans, and 2.1% of the borrowers were viewed by Fitch as having a prior credit event in the past seven years. Per the transaction documents, two of the loans have subordinate financing. In Fitch’s analysis, Fitch also considered loans with deferred balances to have subordinate financing. In this transaction, there were no loans with deferred balances; therefore, Fitch performed its analysis considering two of the loans to have subordinate financing.

Fitch determined that 37 of the loans in the pool are to foreign nationals. Fitch treats loans to foreign nationals as investor occupied, coded as ASF1 (no documentation) for employment and income documentation and removed the liquid reserves. If a credit score is not available, Fitch uses a credit score of 650 for these borrowers.

Of the loans in the pool, 38 are agency-eligible loans underwritten to DU/LP with an ‘Approved/Eligible’ status.

Although the borrowers’ credit quality is higher than that of AOMT transactions securitized in 2022 and 2021, the pool’s characteristics resemble those of nonprime collateral, and, therefore, the pool was analyzed using Fitch’s nonprime model.

Geographic Concentration (Negative): The largest concentration of loans is in California (42.5%), followed by Florida (16.4%) and Texas (8.7%). The largest MSA is Los Angeles (23.0%), followed by Miami (7.9%) and Riverside (5.3%). The top three MSAs account for 36.1% of the pool. As a result, there was a 1.02x penalty for geographic concentration, which increased the ‘AAAsf’ loss expectation by 23 basis points (bps).

Loan Documentation (Negative): Fitch determined that 89.7% of the loans in the pool were underwritten to borrowers with less than full documentation. Per the transaction documents, 90.5% of the loans in the pool were underwritten to borrowers with less than full documentation. Fitch may consider a loan to be less than a full documentation loan based on its review of the loan program and the documentation details provided in the loan tape, which may explain any discrepancy between Fitch’s percentage and the transaction documents.

Of the loans underwritten to borrowers with less than full documentation, Fitch determined that 59.4% were underwritten to a 12-month or 24-month business or personal bank statement program for verifying income, which is not consistent with Appendix Q standards and Fitch’s view of a full documentation program. To reflect the additional risk, Fitch increases the probability of default (PD) by 1.5x on bank statement loans. In addition to loans underwritten to a bank statement program, 23.1% comprise a debt service coverage ratio (DSCR) product, 0.1% comprise a no ratio product, 1.2% are an asset depletion product and 3.4% are third party-prepared 12 month-24 month P&L statements, with some of these loans having two months of bank statements for additional documentation.

Three loans in the pool are no ratio DSCR loans; for these loans, employment and income were considered to be no documentation in Fitch’s analysis; as such, Fitch assumed a DTI ratio of 100%. This is in addition to the loans being treated as investor occupied.

Limited Advancing (Mixed): The deal is structured to six months of servicer advances for delinquent P&I. The limited advancing reduces loss severities, as a lower amount is repaid to the servicer when a loan liquidates and liquidation proceeds are prioritized to cover principal repayment over accrued but unpaid interest. The downside is the additional stress on the structure, as liquidity is limited in the event of large and extended delinquencies.

The ultimate advancing party in the transaction is the master servicer, Computershare. Computershare does not hold a rating from Fitch of at least ‘A’ or ‘F1’ and, as a result, does not meet Fitch’s counterparty criteria for advancing delinquent P&I payments for classes rated ‘AAA‘ and ‘AA’. Fitch ran additional analysis to determine if there was any impact to the structure if it assumed no advancing of delinquent P&I for the losses and cash flows for the classes that would be rated higher than Computershare’s rating. This is in addition to running the loss and cash flow analysis assuming six months of delinquent P&I servicer advancing, per the transaction documents. Assuming six months of delinquent P&I advancing was the most conservative, so Fitch’s analysis is based off of this scenario.

Modified Sequential Payment Structure (Neutral): The structure distributes collected principal pro rata among the class A certificates while excluding the subordinate bonds from principal until all three A classes are reduced to zero. To the extent that either a cumulative loss trigger event or a delinquency trigger event occurs in a given period, principal will be distributed sequentially to class A-1, A-2 and A-3 bonds until they are reduced to zero.

There is excess spread in the transaction available to reimburse for losses or interest shortfalls should they occur. However, excess spread will be reduced on and after February 2027, since class A certificates have a step-up coupon feature whereby the coupon rate will be the lesser of (i) the applicable fixed rate plus 1.000% and (ii) the net WAC rate. To offset the impact of the class A certificates’ step-up coupon feature, class B-2 has a stepdown coupon feature that will become effective in February 2027, which will change the B-2 coupon to 0.0%. In addition, the transaction was structured so that, on and after February 2027, classes A-1, A-2 and A-3 would receive unpaid cap carryover amounts prior to class B-3 being paid interest or principal payments. Both of these features are supportive of classes A-1 and A-2 being paid timely interest at the step-up coupon rate and class A-3 being paid ultimate interest at the step-up coupon rate.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper market value declines (MVDs) than assumed at the MSA level. Sensitivity analyses was conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.

This defined negative rating sensitivity analysis demonstrates how the ratings would react to steeper MVDs at the national level. The analysis assumes MVDs of 10.0%, 20.0% and 30.0% in addition to the model-projected 40.3% at ‘AAAsf’. The analysis indicates that there is some potential rating migration with higher MVDs for all rated classes, compared with the model projection. Specifically, a 10% additional decline in home prices would lower all rated classes by one full category

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch incorporates a sensitivity analysis to demonstrate how the ratings would react to steeper MVDs than assumed at the MSA level. Sensitivity analyses was conducted at the state and national levels to assess the effect of higher MVDs for the subject pool as well as lower MVDs, illustrated by a gain in home prices.

This defined positive rating sensitivity analysis demonstrates how the ratings would react to positive home price growth of 10% with no assumed overvaluation. Excluding the senior class, which is already rated ‘AAAsf’, the analysis indicates there is potential positive rating migration for all of the rated classes. Specifically, a 10% gain in home prices would result in a full category upgrade for the rated class excluding those being assigned ratings of ‘AAAsf’.

This section provides insight into the model-implied sensitivities the transaction faces when one assumption is modified, while holding others equal. The modeling process uses the modification of these variables to reflect asset performance in up and down environments. The results should only be considered as one potential outcome, as the transaction is exposed to multiple dynamic risk factors. It should not be used as an indicator of possible future performance.

Best/Worst Case Rating Scenario

International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAAsf’ to ‘Dsf’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10

Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by SitusAMC, Canopy, Clayton, Consolidated Analytics, Covius, Evolve, Infinity, Inglet Blair, Maxwell Recovco, and Selene. The third-party due diligence described in Form 15E focused on three areas: compliance review, credit review and valuation review. Fitch considered this information in its analysis and, as a result, Fitch did not make any adjustments to its analysis due to the due diligence findings. Based on the results of the 100% due diligence performed on the pool, the overall expected loss was reduced by 0.37%.

DATA ADEQUACY

Fitch relied on an independent third-party due diligence review performed on 100% of the loans. The third-party due diligence was consistent with Fitch’s ‘U.S. RMBS Rating Criteria.’ The sponsor engaged SitusAMC, Canopy, Clayton, Consolidated Analytics, Covius, Evolve, Infinity, Inglet Blair, Maxwell Recovco, and Selene to perform the review. Loans reviewed under these engagements were given compliance, credit and valuation grades and assigned initial grades for each subcategory.

An exception and waiver report was provided to Fitch, indicating the pool of reviewed loans has a number of exceptions and waivers. Fitch determined that the exceptions and waivers do not materially affect the overall credit risk of the loans due to the presence of compensating factors such as having liquid reserves or FICO above guideline requirements or LTV or DTI lower than guideline requirement. Therefore, no adjustments were needed to compensate for these occurrences.

Fitch also utilized data files that were made available by the issuer on its SEC Rule 17g-5 designated website. The loan-level information Fitch received was provided in the American Securitization Forum’s (ASF) data layout format.

The ASF data tape layout was established with input from various industry participants, including rating agencies, issuers, originators, investors and others, to produce an industry standard for the pool-level data in support of the U.S. RMBS securitization market. The data contained in the data tape layout were populated by the due diligence company and no material discrepancies were noted.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction’s representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by clicking the link to the Appendix. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled ‘Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions’.

ESG Considerations

AOMT 2023-1 has an ESG Relevance Score of ‘4’ (+) for Transaction Parties & Operational Risk due to strong due diligence results on 100% of the pool and a ‘RPS1-‘ Fitch-rated servicer, which has a positive impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

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