Environmental, Social and Governance Investing – A Responsibility We Take Seriously

Environmental, Social and Governance Investing – A Responsibility We Take Seriously

Environmental, Social and Governance (ESG) Investing is a phrase you might start hearing more often as it continues to gain importance. It’s important to deploy capital to meet a social or environmentally impactful need to help underserved borrowers or areas affected by extreme environmental changes. Learn why it is important to create special programs and lending strategies to address underserved borrowers. As well, understand more about the governance framework and regulatory requirements from lenders and investors.

Director of ESG and Regulatory Initiatives with Angel Oak Capital Advisors, Robert McDonough explains why this matters to you and the mortgage industry.

Environmental, Social and Governance (ESG) Investing is a phrase you might start hearing more often as it continues to gain importance. It’s important to deploy capital to meet a social or environmentally impactful need to help underserved borrowers or areas affected by extreme environmental changes. Learn why it is important to create special programs and lending strategies to address underserved borrowers. As well, understand more about the governance framework and regulatory requirements from lenders and investors.

Director of ESG and Regulatory Initiatives with Angel Oak Capital Advisors, Robert McDonough explains why this matters to you and the mortgage industry.

Welcome to Your Mortgage Matters brought to you by Angel Oak Home Loans, your weekly look into what’s new in the mortgage business and how it impacts you. And now your host, Michael Chabot.

Michael Chabot
Hey guys, welcome back to another episode of Your Mortgage Matters brought to you by Angel Oak Home Loans. I’m your host, Michael Chabot. And we’ve got a real good one here for you today. So sit back, relax and get ready to learn some more. So here at Angel Oak, we want everything we do to have a positive environmental and social impact in the communities we serve. This includes our lending activities, investment strategies and corporate initiatives, we can create a sustainable and more prosperous society through our leadership role in the financial services industry. In lending, we develop sound underwriting programs that provide access to housing for underserved borrowers, such as the self employed small business owners and those with imperfect credit histories. And investing we develop excuse me, we deploy our investors capital into strategies that have a positive environmental and social impact, while optimizing their risk adjusted returns. And within corporate initiatives, our focus on the well being of our associates and our community show our commitment to being responsible corporate citizens. Today, our guest is Rob McDonough. He’s the director of ESG and regulatory initiatives. Rob, welcome to the show.

Rob McDonough
Thank you. Good to be here.

Michael Chabot
My pleasure. So the first question I have for everybody is, what does environmental, social and governance ESG investing and lending mean?

Rob McDonough
Sure so each of those different factors really represents the three pillars of sustainable investing and lending practices. And when you’re talking about investing or lending, you’re really saying we’re bringing capital to meet some sort of positively social or environmentally impactful need to address some some specific underserved borrower or an area that can use some kind of improvement from an environmental perspective. So it’s really about deploying capital. And Angel Oak is particularly well positioned to do this, because we have, as you know, a vertically integrated business model, where we have the mortgage lending. And we create special programs, particularly our non QM lending strategies to address underserved borrowers. And we also have the ability to bring capital markets into the mortgage lending space by financing our mortgage lending through securitizations. So the asset management aspect of Angel Oak business really oversees that vertically integrated process. And we believe it’s critical to our core business model that we integrate the environmental considerations positive social index. And we do this within a strong governance framework that ensures that we adhere to all the regulatory requirements that we have both as lenders and investors.

Michael Chabot
Nice. So it’s not just about lending, right? There’s a lot of things that go on behind the scenes than just writing mortgages for people.

Rob McDonough
Sure, I mean, mortgage lending in many senses is where it’s hard. So the Angel Oak Capital Advisors, the asset manager, entity within our organization, invest across other investment opportunities as well that align with ESG principles. But in many respects, we have mortgage lending really at our hearts, we started investing with the formation of the company in mortgage related securities. And we also began the mortgage companies in 2011, to take advantage of some of the opportunities that were created by legislation that, ironically, was intended to stop predatory lending practices, but at the same time also excluded certain borrowers who were legitimate credits from the mortgage markets. And that business opportunity, helping underserved borrowers is really core to our model

Michael Chabot
Yeah, I agree. And so, I mean, a little off note thing here is I mean, self employed borrowers, unfortunately, have definitely suffered from a lot of the changes that we’ve seen made.

Rob McDonough
And absolutely, maybe it would pay the to create a little context around that, because a lot of that is really driven by legislation that was very well intended. I think all of our viewers will be familiar with the outcomes of the great financial crisis and the problems that were created through the mortgage practices at the time, which were in many respects, unregulated, especially in the subprime space. And Dodd Frank is a body of legislation, which you know, people refer to it as being 20 Bibles tall, you know, if you print it out, it addressed a lot of different areas, but it’s specifically also focused a lot on mortgage lending practices. And the idea was to put very stringent guardrails around mortgage lending, so that we didn’t see these predatory lending practices continue. Now, the unfortunate outcome of that was that these requirements were so stringent that it actually lends itself pretty well to an automated underwriting kind of environment that lenders in the mortgage space can take advantage of software packages that would accept standardized documents and make the process very efficient and it was able to consume data about DTI is or LTVs or income, but it had to be in a very standard format. So if you are employed by a corporate entity, for instance, and you get a W two wage income, then your data fits right into that automate. underwriting process. But if you’re self employed, and you have non standard sources of income, or if you’re in the gig economy, you might have multiple projects going at the same time with various income sources that come together. A lot of underwriting processes can’t handle that information and that excludes those legitimate borrowers, often from the from the housing, finance and access to housing in general. So that was the need that we wanted to address when we started our mortgage companies in 2011.

Michael Chabot
Yeah, and I think just one last thing on that, and then we can move forward is that, you know, income taxes, and we’ve talked about this on other episodes, income taxes were never meant to, for applying for a home and showing what your income is, they’re really meant for showing what your tax liability is, right?

Rob McDonough
Absolutely. So you can imagine a scenario where someone on their taxes are legitimately reporting their income, but they’re also legitimately recognizing a number of deductions, which might be for instance, tax loss carryforwards, from losses on other investments, which shields their income from taxation, but it reduces their reported income down to very low levels. And if you rely on that strictly as your underwriting sources, information for income, you might see a big goose egg on that application. But it doesn’t mean that that borrower doesn’t have the ability financially the service mortgage

Michael Chabot
agreed. And then one last thing in this, in your opinion, do you think from a GSE, a Fannie Freddie and Ginnie Mae, do you think we’ll see any kind of change there? Will they look at? Will they do you think in the future, they’ll go excuse me open up to other sources? Do you think they’re going to stay just right on the line?

Rob McDonough
Yeah, I imagine that the Ginnie Mae, Fannie Mae, Freddie Mac’s mission will evolve over time. And, you know, depending on the administration, and depending on the, you know, the political climate that you happen to be in any given time, there are, you know, various preferences for the role of the GSEs. In mortgage lending. Some of that is, let’s get less involved, let’s get the government out of the mortgage insurance business. And let’s let private capital serve all these needs. Or sometimes it’s let’s get more specific about how we want the GSEs to help like, specifically finding affordable housing projects or something like that. So I believe that the mission of the GSEs will always be to try to increase the availability of housing, finance to get people into private homeownership, what form that takes, so it’s really up in the air. And as you know, the Qualified Mortgage standard is, has recently been somewhat shifted and adopted. And we think that’s going to be a fluid process going forward. And we really think it creates opportunities to bring more private capital into the mortgage space, which means addressing the needs of a more diverse pool of borrowers.

Michael Chabot
And so that’s that’s a perfect segue into my next question, which is, how here at Angel Oak, do we commit to providing financial security to our investors through the integration of ESG?

Rob McDonough
Sure, so when you bring our investors into the equation, it really doesn’t change the dynamic at all, it really fits in with our core story, which is we’re trying to deploy capital into the housing market in a way that gives broad access to that credit to all borrowers who can afford to pay a mortgage, particularly we’re adjusting to underserved borrowers. So our investors, of course, they’re, we’re deploying their capital on their behalf as an asset manager. But they obviously they want to accomplish a number of goals, some of which are financial and economic, they want to get good returns on a risk adjusted basis. And so we have to provide them with that. But they also often want to create or achieve some kind of social, socially beneficial or environmentally beneficial outcome. So we have to be very transparent about how we accomplish both things. Unfortunately, the Angel Oak, we really believe that we can accomplish both of those things at the same time. And the reason we believe that is because we are not identifying credit impaired borrowers, and out of the goodness of our hearts, giving them a loan, we’re going through a very stringent underwriting system and framework to make sure that we’re identifying borrowers who will repay and will provide the kind of returns that our investors are looking for. So we’re we have to marry both aspects of the the economic and financial goals and objectives that our investors have with the fact that they also want to have a positive social, environmental impact.

Michael Chabot
Sure correct me if I’m wrong, but I’ve heard that the loans that we’re doing in securitizing these non QM loans are there performing as well as the GSEs, Fannie, Freddie, etc. Is that right?

Rob McDonough
No, that’s, that’s, that’s an accurate statement. And of course, in March of 2020, you know, the world changed in many significant ways. And we certainly saw a spike in delinquencies. In the non QM space, as well as in the q&a space, I would save the data probably suggests that non QM loans maybe were hit a little harder by COVID. And there’s some very important reasons for that. You yourself earlier mentioned that we sort of self employed borrowers and think about small business owners, sole proprietors, people that work in restaurants or in retail, those who are individuals, whether they’re borrowers or not, you are particularly hard hit by COVID. So the fact that delinquencies on non-QM mortgages might have been a little higher in the early stages of the pandemic. That’s not surprising. We have seen this tremendous rates of curing of those delinquent loans. So that in a very short period of time, the delinquencies were actually rolling over into performing status at about the same rate that the AC conforming mortgages were.

Michael Chabot
Yeah. So that I mean, a lot of people think and kind of feel like Q non QM is is what subprime used to be. And that’s not the case.

Rob McDonough
Absolutely not. And that’s something that we’ve fought an uphill battle with, you know, changing that perception about what non QM lending is, and you still will be cured people say that, but you know, we have some very hard data supporting the fact that that’s not the case. In fact, if you look at our securitizations, which is where many of our non-QM mortgages end up in these pools of securitizations, the credit numbers for our deals are consistently higher in terms of, you know, LTV, or DTI or FICO than agency transactions. And that’s because self employed borrowers fans, a broad spectrum of borrowers, you know, it’s not just somebody who’s working in a restaurant, that might be a first time homebuyer, you could also be a very successful legal or medical practice where a doctor or lawyer is a sole practitioner, and wants to take out a mortgage. So the credits, metrics for our deals are generally in fact stronger than the agency transactions themselves. Now, that’s not to say that we don’t also try to serve some of the lower income constituency of borrowers, but we don’t specifically specifically target those borrowers. Instead, what we’re trying to identify is underserved borrowers who are left out of the AMC lending framework.

Michael Chabot
I know this is probably we’ve covered it already. But it’s in my notes, which is how important is ESG? To Angel Oak? And why are we doing this?

Rob McDonough
So there are two ways to answer the question. And one is kind of from a business model perspective in Angel Oak really saw our founders really saw this opportunity in the aftermath of Dodd Frank, where there were borrowers who could not get loans from banks. So there are many anecdotes of people who went to a bank to get a loan. And you know, pretty well off people that were trying to buy houses for their primary residence, and they will get turned down from the bank and they take out, you know, a $1.5 million mortgage or apply for one and get it turned down. So they pay cash instead, right? Now, what does that say about an underwriting process where a borrower actually has the cash to buy the house outright, and yet a bank won’t lend to that borrower? That was problematic. And so that was the opportunity that Angel Oak saw. So economically, we knew based on pre crisis levels of borrowings for self employed individuals that there was a huge market and a huge opportunity, probably a trillion dollar market that had been unmet by agency lenders, and wasn’t going to be met because of these regulatory limitations. So so that drove our initial the founders of Angel Oak initial decision to get into the this type of business in the first place. What we’ve also found is that, you know, culturally, this is a great way to build a business model, because it is founded on having this very positive social impact, that is largely very environmentally benign. And there are very positive measurable benefits to this kind of lending, I mean, getting more access to private homeownership, and a number of other factors that we look at when we are deploying our investors capital into these kinds of loans. So I mean, culturally just fits in with the kind of work that we want to do.

Michael Chabot
Well, and I love it, because we know with studies that homeownership brings pride to neighborhoods to communities, right? I’ve heard it said that, you know, typically, they when somebody rents a car, they don’t take great care of it. But when you own the car, you wash it, you clean it, you service it, right? You go to the local repair shops and stores and it’s the same when you own a home in that community. You’re supporting all of those businesses, you’re helping the community. So I love the fact that that as a as an organization, we’re doing our part on that side of it. The other thing I wanted to add, before I get to my next question is, I think we would agree and you mentioned at the top of this is, you know, the gig economy with with all these different things that people can do these days, especially post pandemic, you’re seeing more and more people that want to do their own thing. They don’t necessarily want to work for a big company anymore, or they want to have something else on the side to supplement maybe their W two income. Where do we see as an organization and I apologize if you don’t know this upfront? I’m just wondering, where do we see as an organization where this segment of the market is going a week? Do we believe it’ll continue to grow?

Rob McDonough
Sure. So you know, COVID was obviously a blow to society in many respects, but we have tried to look for the silver lining. And one of the things that it’s done is reframe the way that we think about work and how we work and some people are now referring to the pandemic as the great resignation because so many people have resigned from their jobs and not reentered the traditional workforce, but instead are coming up with new entrepreneurial ideas or starting companies, or I’m entering into partnership agreements, where there consortiums of different types of workers in organizations coming together that are not in the, you know, traditional corporate model, or what we consider to be kind of company wage income. And so we think there’s a tremendous opportunity that that is only going to grow because people are seeing the attraction of really controlling their own destiny more, and being able to do more specifically what they want to do and create the kind of work they want to do. So that’s definitely the silver lining both for society at large, as well as Angel Oak. So those are ready made borrowers for ageless lending model.

Michael Chabot
Agreed and comment and then next question, but My comment would be as I think it’s the same thing, why we saw, you know, not just low interest rates, but why we’ve seen such a housing boom, since the pandemic, because I think just like with people in their work life in their personal life, and it may be combined the two they said, you know, what, COVID made me realize being stuck at home that I want to either remodel this house, I want a bigger house, I want to relocate to a different area, because now I can work remotely. So I think that’s, that’s been great. All right. So back on track, can you explain our responsible investment or as we call ri policy, and how that supports the delivery of ESG?

Rob McDonough
Sure. So our implementation of what we call ESG integration is not just specific to our mortgage lending programs, although that’s very important to us as a company, though, as a, as an integrated company, we really have a top down approach to ESG. And so we developed our responsible investment policy to govern all of our investment activities across various funds and accounts and investors. And to ensure that we had processes to measure and ensure that everything that we do is seen through an ESG lens, at least those strategies that we invest in that are ESG, designated. And I think we’ve been very progressive as a firm to really cast a very broad net in terms of what our ESG integration program covers. So for instance, it covers our mortgage lending investment activities, our securitization activities, Angel Oak was the first issuer in the US of A non agency, non QM social bond. In fact, we’ve had two of those issues, and those were very well received. And that’s again, an indication of the extension of our ESG integration program. And that also extends to the public funds, the mutual funds that we manage at the asset manager, as well as the number of private credit strategies that we manage for institutional investors. So with all of those different areas, we really needed a policy to be able to govern all of those activities. And over and above that, it also speaks to some of our corporate initiatives and our commitment to the community, for instance, with our community engagement, our Community Relations Committee, our diversity, equity and inclusion efforts around both recruitment and retention, and other socially impactful corporate initiatives that we had. So really, to be able to be effective at this, we needed a policy that would govern all those aspects of our business and bring together our ESG integration efforts so that not only are we lending to borrowers, and having a social impact there, but we’re bringing capital in the form of securitizations to that kind of lending activity. And that’s benefiting our investors who want to have positive social impact. So our ROI policy really extends across our entire corporate structure.

Michael Chabot
Yeah, I love that answer. Thank you. And one question. That’s a little off script. But we’ve been talking about Angel Oak and the vertical integration. Can you just take a moment and explain what that means to our listeners? Because Angel Oak is definitely different than most mortgage companies.

Rob McDonough
Absolutely, so mortgage lending is one aspect of our business model. And when we talk about our vertically integrated business model, where we really start is at the foundation, our mortgage lenders are originating various types of loans. The non QM loans that our mortgage companies originate, are generally funded by capital that comes from our investors. Many of our private institutional investors provide this investment capital that we then deploy to the mortgage markets. Ultimately, though, we take these pools of mortgages that are being held by our private institutional clients, and turn them into securities through the securitization platform, Angel Oak mortgage trust that we’ve developed. And that brings capital markets into the mortgage lending equation. And our private investors are not only providing capital for the initial loans, but they also retain a piece of the securitizations that we create. And that gives our investors skin in the game to ensure that we continue to lend in a responsible fashion that is, their capital won’t hang around if we don’t make the right loans to the right people. If we start to see defaults and issues with our mortgage lending programs, then our investor capital will disappear. So across the entire 30 vertically integrated model ESG has to be there to make sure that we can bring that capital to the mortgage markets.

Michael Chabot
I love that. Thank you. That’s a great answer, which goes into the next one, which is explain how incorporating it SG and a sustainable economy are linked.

Rob McDonough
So one of the things that we’ve been fortunate with is that we were doing ESG. Before he used it was cool. And we didn’t even know what the issue was back in the day when we started to try to say, what kind of an impact can we have? And where’s the opportunity in the mortgage space? Because really, mortgage lending was where our company’s founders really had their specialized expertise, not only in mortgage lending, but also investing in mortgage related securities. So a broad base of experience in the mortgage space. And the opportunity was really to say, okay, how can we be making a substantial impact and difference in a sustainable economy large? Where do we fit into that, and the way that I think we fit into it is something that you touched on earlier, which is if you think about the importance of community, and the strength of let’s say, a city, for instance, or a town, you have to have many components coming together, one aspect of that would be, for instance, the housing, do you have housing this broadly available for a diverse workforce, one of the biggest problems that we found during COVID Is that a lot of frontline workers like firemen, and policemen and teachers, and med techs and medical personnel, weren’t able to find the right kind of housing, like workforce housing, in urban areas. And so by broadening our, the access to housing with our lending programs, we’re actually making more sustainable communities and cities, that again, I’m going to be stronger in the longer term, and housing is one part of it, where we can contribute the most. Now, of course, you know, Strong Cities are driven by a lot of other economic factors as well. But it’s always fascinating to me the extent to which you can point to the importance of housing and broadly available different types of housing as a critical success factor for communities.

Michael Chabot
Great answer. I absolutely love it, which just leads me right into my next question. So it’s a two parter. So does this make us a more purpose driven company? Number one, and you know that then the other question is, for me is Who wouldn’t want to work with a lender or a company with such an admirable focus?

Rob McDonough
Yeah, you bring up a really interesting point, because when he he started to become, I think, more well known and more socialized in the press. And as investors began to pay more important, more attention to it. A lot of people tried to kind of jump on an ESG bandwagon. And I don’t mean to be critical of anyone’s efforts to have positive social impact or, or to help the environment. But a lot of asset managers and others, sources of capital, engage in activities, which is broadly been referred to as greenwashing. And greenwashing is really a way of saying, We claim that we’re being environmentally beneficial are that we’re trying to do something with positive social impact. But we’re just kind of putting a cover over it, we’re not really changing fundamentally what we’ve been doing. And at Angel Oak, we didn’t really have to change our business model, all we had to do was to create an issue framework to be more transparent about what we have always been doing that aligns with ESG. And that was really beneficial to us, because it helped us to communicate our message much more strongly to investors, to other stakeholders, including our borrowers about how we’re trying to have social impact. So really, the fundamental change in terms of sustainability and ESG, for Angel Oak was that there became various organizations that were promoting ESG standards, that we became members of, for instance, the UN’s principles for Responsible Investing, we joined that organization in 2017, because we wanted some help in creating a stronger message about how we were already doing these socially beneficial things. And that framework really creates a common language for, for us to be able to talk to our key stakeholders about how we’re doing this. So really, the opportunity for us over the past few years has been to be more transparent about things that we were already doing. And that’s why Angel Oak, I think, in many respects has been so successful, because we’ve had the commitment from our key associates to want to have this social impact. And now we know how to talk about it later.

Michael Chabot
Yeah, I love that such a great answer. And you know, it just makes me proud to be part of this organization. It’s why I love doing a show like this too, because I get to soak in all of this stuff. And now I can go out and share it with everybody else. Alright, so I recently did another show with a climate expert, Dr. Shaun Piketty who was talking about climate risks that cannot be ignored by financial institutions like droughts, floods, wildfires, you know, rising sea levels, etc. And I’ll let you answer the question here. But it’s interesting, because, you know, we all know climate change is is an issue that we all need to be mindful of and start working towards. But I, you know, as a loan officer in this industry, never kind of put two and two together until I did that interview. And so my question to you is, is this a part of why integrating ESG is also important.

Rob McDonough
Absolutely. and it gives me an opportunity to talk about how data driven we have been. Because earlier I was saying that, culturally, this is a part of what we do. But really, we have to be able to demonstrate this to our investors and to our other stakeholders. And so we’ve taken a very data driven approach. To this point, what we’ve been talking about really is largely the social impact that many of our lending programs have been our investment strategies out, but the environment is a critical part of the conversation. And this has been going on in Europe for years, and investors in Europe are very attuned to how they can have an impact in the climate space. They’re also very attuned to climate risk. And, you know, fortunately, or unfortunately, in the in the US, climate risk has not had the same profile that it has had in other geographies. And in fact, when COVID came along, COVID really shone a very bright light on ESG, but primarily the s component, the social components. So it identified issues like social inequalities, or racial inequality, some of which could be addressed by the investment community. But what we’ve recently seen is in the US, in particular, there’s been a shift to starting to think about climate risk. And you know, the prevalence of wildfires in the West and the news coverage that gets and the increased flooding, and the damage from hurricanes, and all of these messages are starting to resonate in the US now. And so in order to show that our lending and investment activities are having a positive environmental impact, we’ve had to be very data driven. And we have married a lot of our loan origination data with other sources of environmental data that come from publicly available sources. We’ve also had a lot of good demographic information to come from census data, for instance, and we’ve just recently completed a substantial project that helps us to map some of those elements that you mentioned, wildfire landslide, flooding, Hurricane data down to the loan level in the investments that we’re making and the lending that we’re doing. And so what that gives us is it gives us the intelligence of what kind of climate risks are we taking on by lending in certain areas. And if an investor has a question about an investment that they’re making, or loans that they’re holding, they can come to us, and we can tell them that story, we can say this is where your exposure is, this is where the risk is. Maybe there’s also some opportunity, right to create housing in areas that are that are safer, because as you mentioned, with rising sea levels, and the increase of climate disasters, you know, people are going to be shifting where they live. So getting our arms around this data can help us to anticipate some of those housing patterns that will be climate driven. And we can be more responsive and more nimble in our reaction to them.

Michael Chabot
Yeah, there’s so much what I’ve learned in doing this show is there’s so much that goes on beyond and behind the scenes, there’s so much to look at, as an organization to be a responsible lender and to give back to the communities and always looking forward, you know, in in the in the industry to make sure you’re a leader and continuing to help the society become a better place. So really good stuff. All right. So next question. Oh, sorry. Go ahead. Rob, please.

Rob McDonough
Say it’s a similar to a conversation that we have with our investors where, you know, we’ve always generated strong risk adjusted returns for our investors when they invest in our mortgage related strategies. But when they started to kind of open up the hood, or peel away the layers of the onion, you know, they started asking questions about social impact or environmental impact that we could show them? Well, look, we’re addressing self employed borrowers, sole proprietors, small business owners, but we’re also lending to first time homebuyers, or people who are getting assistance with downpayment, we’re helping to share credit, in some instances where people have an imperfect credit history, they can’t get a loan from a bank, but they just IPO their tech company and they can pay their mortgage. You know, we’re helping across the board there. And now we’re starting to also get additional transparency into a lot of this climate information. And you know, recognize that there may be places that are hotbeds for lending activity, but will be so hot in 10 years that you’ll be challenged to support housing in some of those areas. Now, I’m not trying to be a doomsayer. But you know, there are going to be private impacts that will drive decisions about where people live and work. And so our investors have really had lightbulbs gone out over their heads when we present them with this kind of information.

Michael Chabot
Yeah, it’s pretty information and to put a bow on this. I mean, we were we as an organization, Angel Oak were affected by a recent hurricane because we have some support staff in Louisiana, right. And we had you know, so it’s, I didn’t realize this that the city of New Orleans is now below sea level, which is interesting, but those are the type of things I would think moving forward in the future that homebuyers will look at lenders will look at investors will look at out west and California where I lived for the last you know, 40 plus years, you know wildfires have become every year it seems like they’ve gotten worse and worse and worse. So anyway, we could probably do a whole show just on that.

Rob McDonough
I’m saying because you you introduced it I have to point out probably are dead at Angel Oak We’re a national company, we have lending operations all throughout the country. But when Louisiana in particular was hard hit by that weather event, I mean, it was immediately like the switch was flipped. And our, our responsible investment policy, and our community engagement and our community relations kicked in. And we immediately started channeling some individuals and corporate capital towards that market to make sure that they had clean food and water, that there was help from a variety of agencies and provided medical care, and repair the housing and things like that. So we really, were able to leverage our corporate culture to help out that particular situation, and that we would have done that anyway. But it was made easier because we already had a community relations framework in place that helped us to channel some of these donations. And, and, and, you know, paid time off from some of our employees who, you know, did some work in those areas. So, again, that’s another indication of how our ESG integration program grows across all of our corporate activities,

Michael Chabot
agreed. And and the last thing I’ll say on this to my next question is it was it was inspiring to see as an organization, we had employees from all over the country donating money, sending supplies, you know, food, opening their homes, to other employees, you know, so it’s, it’s a really great thing to see. And you can see that it goes throughout the entire organization. Alright, I think we answered this question. But I haven’t written down so I have to ask it, which is, why has Angel Oak made it a priority to stand out as a responsible corporate citizen, integrating ESG into the lending process?

Rob McDonough
So one reason is because that’s who we are as a company and our culture, it literally who we are, it is what works best for us. So we talked about a number of examples from the situation in Louisiana to the reason that we formed the company in the first place, which was, you know, to help underserved borrowers on the mortgage side. The other thing that it does is it allows us to be successful as a company, because it allows us to attract capital to all of our ventures and strategies, because when we show that we have a sustainable model, and then we care about ESG, and sustainability, we bring more capital into the organization, which we can then deploy across these different strategies that are ESG integrated. So honestly, I mean, in some ways, it’s self serving, we’re an asset manager, we get paid to manage assets. But we believe that we will be more successful in attracting capital and deploying it by being transparent about the strength of our ESG integration framework. And we’ve seen that play out. Angel Oak is not the biggest asset manager in the country, it’s not the biggest mortgage lender, we are probably the most significant non bank non QM lender in the country. But nevertheless, we punch above our weight in many respects. And we get inbound calls all the time about, you know, how can we build out our ESG integration framework to be stronger in the mortgage area? Or how can we think about ESG investment strategy similar to what you guys are doing? Will you be on this panel? Or will you come to this conference and talk to us about your, your ESG integration framework, and again, we proportionate to our size, we get a lot of attention about how strong our ESG integration program is. And we think that’s a validation of how strong it is.

Michael Chabot
Yeah, I love that. It’s, I think I’m allowed to say this, which is, that’s probably why we have investors who are lining up now knocking on our door who want to be part of what we’re doing. They want to invest. They want their capital out there working with us. And I think it’s just a great thing. It says a lot about who we are as an organization.

Rob McDonough
Yeah, I mean, I think it speaks volumes to the fact that we were the first to issue a social bonds, there was a non QM mortgage securitization in the US. This has been something similar issues and taking place in Europe, although their mortgage markets are somewhat different from ours. But we were the first it’s because it was important to us to put a stake in the sand and say, This is what kind of company we are. And this is what we’re capable of doing from our securitization platform, you know, come see some of the other things that we’re doing that are potentially environmentally impactful, for instance, and some of our other strategies. So, yeah, it’s helped us become a more successful company by aligning with sustainable, sustainable ESG.

Michael Chabot
Yeah, I agree. Alright, so next question. And again, we’ve covered so much we may be covering it again. But I think it’s really good to pinpoint this, which is, how can lending be socially responsible? And what is the potential to expand access to credit for underserved borrowers? Sure.

Rob McDonough
So we’re always thinking about new things that we can do. Of course, we are innovative, and we’re entrepreneurial. So we’re always thinking about new products. And I think we’ve talked a lot about some of the positive social benefit that our non QM lending programs have. We think about a variety of different ways that we could expand our lending into other socially impactful areas. We have to also be very thoughtful about this because we’re a highly regulated industry, mortgage lending after Dodd Frank in particular has some important guardrails. And by the way, non QM, was born out of Dodd Frank. It’s not what was left over by Dodd Frank created QM and non QM. And it’s a very stringent set of underwriting standards, including the fact that we have to demonstrate ATR or the ability to repay for all of our borrowers, which is one of the critical reasons why non QM is not subprime lending, because our borrowers have to be stress tested in terms of their ability to be able to repay their loans over the lives of their mortgages. So so when we think about additional lending opportunities, we have to be very thoughtful of what we do to ensure that we’re giving out credit according to the Fair Credit Act and fair lending laws. And we have a lot of ideas about how we can maybe bring in some additional capital, if we were to focus on securitizations that are specifically focused on certain groups like underserved borrowers that might be in a particular minority or ethnic class or something like that. So these are aspirational ideas. But it’s something that we’re always thinking about, because we think there’s opportunity to really address some of the things that we’ve shown a bright light on in the past few years, like social and racial inequality, income inequality, we’re also looking very closely at opportunities to create environmentally sustainable lending programs as well. There are some models for us to follow. For instance, the agencies have the VE M, or energy efficient mortgage programs, which basically provide mortgage housing finance, that assist in implementing energy efficient appliances, or solar panels are geothermal heating or things like that. And so we want to be first movers in the, in the non-QM space to try to develop some products, that would be more of an environmental focus as well. So of course, these are all projects that we’re working on very hard right now, to bring to market. And it’s aspirational at this point. But it’s an opportunity, it’s obviously a huge opportunity to fit into a lot of these commitments around net zero emissions, for instance. And so from a residential mortgage lending perspective, we can help to reduce emissions by reducing the consumption of electricity and the houses against which were lending. There’s a variety of ways that we can have environmental and positive social impact. So we’re looking at it all those channels.

Michael Chabot
Yeah, that’s what I love about this organization is we’re already doing great things, but we’re not satisfied. We’re continually looking to how we can continue to expand and help more and serve more, and push the envelope all within a responsible box, which I love. Right. And you’ve mentioned a few times, you know, the Dodd Frank and we definitely needed some, some bumpers, some, some requirements to live within. And I love that we do I think, you know, some would say we’ve gone a little too far. But I think some of it was a little too far. But it was so far to one side, we had to go I think that far to the other side, I’m sure you would agree. But I love the fact that we are addressing, you know, and we do the agency stuff. We do all those things, right. We do Fannie Freddie Ginni, but I love the fact that we bring products to the table that help underserved borrowers, and that this is leading into my next question, and give them a viable solution that is affordable, you know that and it’s responsible. So we’ve been talking about underserved borrowers a lot. So in talking about those with non standard sources of income not under qualified or subprime, right, we want to make sure that we really delineate between that. And people I think in especially on the consumer side, excuse me, they confuse the two. Can you talk about and I know we have, but let’s really drill down who the underserved market is and why it’s important to focus on them.

Rob McDonough
Yeah I think one starting point would be to distinguish between what QM and non QM as well, both of which are defined by Dodd Frank and have had additional regulatory overlays coming from the CFPB and other organizations. But essentially, mortgage lending is highly regulated, whether it’s QM or non QM. And QM lending, or maybe referred to as agency lending is a kind of lending that meets the standards that Fannie and Freddie and Ginnie have set up for their securitization programs. So you have a take out if you’re a mortgage lender and you underwrite to the agency standards non-QM lending is another kind of lending. And what it really involves is getting much more sophisticated in the way that you look at sources of income. There are some other differences, but that’s really what it boils down to. So if you get a W two from one company, or even from two companies, at the end of each year, and you have those WT s in your hot hands, when you go apply for a mortgage, it’s going to fit seamlessly into their application program. But if you are someone who’s creatively, you know, small business owner or entrepreneur that’s making money in a very legitimate but different way from wage income, then you’re going to be probably At least shut out of the agency conforming standards and their underwriting programs. So we don’t want to discourage entrepreneurial activity or creative ways of making money, and then certainly as long as they’re legal and viable. And so what we have done is we’ve actually gone the extra mile, non QM underwriting is actually much more stringent than QM underwriting is because we have to be able to show the legitimacy of our borrowers incomes, and that means doing a lot more homework, and developing much more rigorous analysis, and looking at things like bank statements, for instance, in addition to tax returns, and, and other sources to verify income. And so once one of our borrowers has gone through our process, I mean, they’ve been much more highly scrutinized than an agency borrower has. And again, this is not subprime lending we’re not lending to, to inherently credit risky borrowers, we will lend to borrowers who have imperfect credit, but only if there are strongly mitigating factors that make their make their application satisfiable. For us. So it’s very different from what subprime lending was in the past. And it’s primarily because we are identifying legitimate borrowers with legitimate sources of income, that AC lenders don’t have the time to process essentially.

Michael Chabot
Yeah, and I think it’s, look, I said it earlier, and you’ve said it all along, we’re doing responsible lending, but we’re using alternative sources of income or when I say alternative, meaning that don’t fit in the normal, Fannie, Freddie, you know, guidelines guideline, and we’re truly making sure what I love. And this ties right into everything we’ve been talking about, we’re making sure that when we give somebody a loan, they can make the payment, that they can stay in this home, that we’re not putting them at risk, which is how I sleep really well at night.

Rob McDonough
Use this three letter acronym a lot to explain that the ATR or ability to repay that has a very specific meaning under the Dodd Frank construct, but it also has a specific meaning to us, which means, look, when you take off this mortgage today, and considering that many things might happen to you over the next 1020 or 30 years, if rates were to go up or down, if your income levels were to go up by a certain percentage or go down or if a variety of other factors like macroeconomic changes, if these things were to occur, then what would be the impact on that borrower’s ability to repay. So we’re not looking just at their current situation, we’re actually required to look at a variety of scenarios and challenge that borrowers economic status. And if they can still qualify under those, those rigorous scenarios, then we lend to them. And that’s what I mean by the fact that our borrowers go through much more stringent underwriting process than the typical agency borrower.

Michael Chabot
Yeah. And I think what I would say is now this is directed at at self employed and self employed has a very broad meaning. But most self employed borrowers actually are taking home more money on a on a weekly, monthly basis, annual basis than a lot of w two employees. But because of the way the guidelines are set up, which we’ve talked about, is they don’t show it because they have you know, being self employed, there are certain tax laws, loopholes, etc, where they can write off more of their income than a W two employee. It’s just the basics of the tax laws.

Rob McDonough
Let me give you an example of a way that we can have positive social impact. So let’s take the situation of a small business owner, right. Small Business Owner is self employed, essentially, and they are making money from their company. So let’s assume that they have a successful company. But because they don’t have strict w two income, because they might take out their money in the form of a dividend or distribution, say as opposed to wages of a typical agency, underwriter can consume that kind of data very effectively. Whereas we can do that. So what has traditionally happened is that small business owners have used revenues from their company to be paid for their mortgages, essentially, to pay for their housing expenses. So what that means is some of the borrowing capacity or financial capacity of that small business is being diverted away from that business, and to the owners housing needs. Now that’s clearly inefficient and inappropriate. So what we do is we break that relationship and we say, we’re going to look at the strength of your company, but we’re going to make you a mortgage on an individual basis, because we understand how this company is rewarding you financially. And again, going the extra mile to the agency underwriter stone, and that’s why are we so effective.

Michael Chabot
That’s a great way to put it. And thank you. I love that answer. So man, time is going by so quickly that I want to make sure I’m respectful of your time. So we could probably go on for another hour or two on this stuff and you’ve been amazing. But So my last question for you is how does Angel Oak make sure that you know, the underserved market these people are no longer underrepresented? And I think we know the answer, but I want to hear it from you.

Rob McDonough
Yes, so we obviously have business in Center’s to identify additional borrowers who are underserved because that’s what we do. And we want to scale up our business. And so what we are incentivized to do is to look at the data that we’re gathering around our ESG integration program to see where there are areas to have additional social impact, right. So we can do this research using the data that we have to source these additional opportunities to look in markets where people aren’t looking now, slicing and dicing census demographic data, for instance, to look for underserved markets that might be not necessarily strictly redlined against from a banking perspective, but just simply aren’t seeing the same capital inflows and other areas are, where there could be an opportunity to create synergies and within existing, corporate hot, you know, like a company that’s looking for hiring workers and stuff, so how we can identify these different economic opportunities in different regions that are currently being underserved. I mean, we’re strongly incentive to go looking for those opportunities, because that’s the sort of lending that we do. And when we identify those opportunities, we start lending there, we’re solving a social impact problem, right. So our solutions are, are inherently solving problems. And I think that’s one of the reasons why we will continue to be as successful as we have. And again, we continue to add to our knowledge by looking into other sources of data and looking for other opportunities where we can meet the needs of underserved borrowers. And one of the things that’s also working in our favor is that the definition of QM is in flux, right? So since we know QM versus non QM, so well, any change is going to result in a dislocation. And that creates an opportunity for us to be able to get in there and build something that’s flexible, and addresses the needs of the borrowers who are at risk of getting left out of housing finance opportunities.

Michael Chabot
Yeah. Rob, you’ve been amazing today, i You’ve shared so much great information. And what I love is you’ve been able to break it down. So though those of us that may not be quite as smart can understand it. And I just really appreciate your time today, it has truly been an honor. And it makes me so proud to be a part of this organization to see what we’re doing. And I would say from the street level, I love the fact that you know, I get so many calls on a monthly basis from borrowers who’ve been turned down by other banks that they can’t get a loan. And we say yes, actually, you fit into our box, we can help you get into that first home. Next home. Last home, right. So it’s, it really is a pleasure to be here. And I want to thank you again for your time. Is there anything you’d like to add? Before we go?

Rob McDonough
No, I can, I hope we can continue this conversation in some future setting because it really is what Angel Oak is all about. And we’re gonna have things to talk about that are going beyond what we’ve talked about today, because we’re going to continue to innovate, and be creative and be entrepreneurial, and come up with new products. You know, I hoped in six months, we’re having another conversation around what we’re doing, specifically around the environment, for instance, because we have a lot of great ideas there. So we’re gonna have this opportunity in the future, I feel sure.

Michael Chabot
I love it. I love it again. Thank you for your time, guys. Those of you listening if you enjoyed this, please share it like it. Tell your friends about it. I think you’ll get a lot out of it. I know I did. Again, this is Your Mortgage Matters brought to you by Angel Oak Home Loans. I’m your host Michael Chabot, and we’ll be back again with another great episode.

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