Private Capital, Skin In The Game, Hail Marys And A Hockey Puck

Private Capital, Skin In The Game, Hail Marys And A Hockey Puck

The latest episode of Your Mortgage Matters is available to watch and it’s one that answers many questions about what we do, why non-QM and how we are setting records in volume.

Michael Chabot, VP licensed area manager and podcast host talks to Angel Oak’s John Hsu, chief risk officer, head of treasury strategies about all of these details. Non-QM is here to stay and growing more crucial as the market brings forth more challenges for homebuyers to purchase and Realtors to protect their earnings.

The market is going to look different as we go into 2022. This podcast explains why you want Angel Oak Home Loans as your lender. We stay ahead of the challenges for YOU. Listen and find out how.

The latest episode of Your Mortgage Matters is available to watch and it’s one that answers many questions about what we do, why non-QM and how we are setting records in volume.

Michael Chabot, VP licensed area manager and podcast host talks to Angel Oak’s John Hsu, chief risk officer, head of treasury strategies about all of these details. Non-QM is here to stay and growing more crucial as the market brings forth more challenges for homebuyers to purchase and Realtors to protect their earnings.

The market is going to look different as we go into 2022. This podcast explains why you want Angel Oak Home Loans as your lender. We stay ahead of the challenges for YOU. Listen and find out how.

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, in case you missed it. In our last episode we featured Steven Schwalb managing partner of Angel Oak Lending. To talk about how Angel Oak has revolutionized revolutionized use me the mortgage industry. This week we’re talking to another Angel Oak leader John Hsu. John is the Chief Risk Officer at Angel Oak Capital and oversees all risk management functions for the firm. He chairs Angel Oak risk management and valuation committee. John also runs Treasury strategies at Angel Oak capital, and is responsible for originating and managing all financial arrangements for new products as well as for the firm’s investment advisory accounts. John has 30 years of experience in financial services spanning operations, commercial banking, structured credit, investment banking, and asset management. 11 of John’s 30 years have been at Angel Oak. Most recently john was head of carp capital markets where he led Angel Oak entry into the non qm asset class by laying the structural foundation for Angel Oak private credit strategies, and founded the Angel Oak mortgage trust securitization shelf. Prior to that genre and operations compliance and risk as co excuse me in that role, john created the legal operational compliant aspects of the Angel Oak multi strategy Income Fund. Before joining Angel Oak john was senior vice president in Aqua and financial corporations alternative investment group where he developed partnerships that invested in NpLS and created investments and msrs and service advances. He was also at SunTrust. mBiA and JP Morgan, refocused on the creation of marketing of structured credit products, mainly focusing on collateral loan obligations. John holds BS and BA degrees in Industrial Engineering and Economics from Rutgers University, and an MBA from Cornell University’s Johnson Graduate School of Management. Wow.

John Hsu
That was a mouthful.

Michael Chabot
I feel a little dumb on this call with you. I mean, that’s, and by the way, Rutgers my home state of New Jersey, I like that. Go Scarlet Knights from there you go. So, John, welcome to the show.

John Hsu
Thanks for having me.

Michael Chabot
That’s quite a bio and intro, you definitely have been around the block a little bit in this industry, haven’t you?

John Hsu
Yeah, just been on when you said 30 years? Oh, gosh, um, when did I become the old guy?

Michael Chabot
Right? I mean, you only look like you’re about 30. So you must say got started when you were really young. So there’s so much to talk about. And I’m sure with your knowledge, we could probably talk for hours, but I know you have limited time. So today, I really want to focus on private capital, our integrated approach and some misperceptions that still exist between non qm or non qualified mortgages and the old subprime days. And I think around Angel Oak, we like to call it above prime now. Is that right?

John Hsu
Thought we call it non prime above prime. Yeah, that’s probably that’s probably right. Yeah.

Michael Chabot
So when we talk about private capital in relation to lending, what do we mean by that?

John Hsu
So private capital is money that comes from institutional investors that seek a return in the asset class thereafter. So like, in this particular case, it’s private capital, but we call it private credit strategies. So the credit is the mortgage credit of the residential properties.

Michael Chabot
Got it? And and explain for our listeners, what’s an institutional investor.

John Hsu
So an institutional investor is a large organization, it could be like a PIMCO, which is an asset manager. It could be Prudential life insurance company, its insurance company, I could be a pension fund for the state of the teachers of the state of Pennsylvania or California, I’m just picking random names that aren’t necessarily Angel Oak clients. It could be a city government. So pension funds. So these are institutions that that sole one of their sole purposes is to invest money.

Michael Chabot
Got it? So it can it’s it’s really a large group of different opportunities of investors. Correct. Correct.

John Hsu
And the important aspect there is that the institutional investors there again, they are professional investors. You know, they sat in the same classrooms you and I did and studied finance. And so there’s this these are smart folks, that again, focus most of their day on sifting through investments and trying to find the good ones. So and with private credit, that’s really Angel Oak ‘s entree into the institutional market, especially in the asset management side. because historically, we were a, like a high net worth type of client. We were that’s that’s the type of person that we attracted, but with the help of the origination, business and private credit, we We are able to attract institutional investors got it.

Michael Chabot
So I think what you’re saying is in the beginning of Angel Oak history, the original investors were high net worth individuals, typically who invested in these products?

John Hsu
Correct. People like you and me, right? That just, you know, had some money. And you know, you know, it’s a lot of money to us. But as compared to like a Prudential life, or a CalPERS, it kind of pales in comparison. And the reason the institutions are important too, because they see so many different investment ideas, and only invest in the best. Having them as a client is really kind of like a seal of approval for what we’re doing.

Michael Chabot
Sure. And when we interviewed Steven, in the last episode, we had talked about how when they first started, and they had to get a track history of, you know, performing and so when you get to this level of institutional investor, what do they look at when you go to them and say, Hey, we’d like you to invest, or are they coming to you.

John Hsu
So when it’s typically the the world usually goes to them, they don’t, they don’t really have to travel much if they don’t want to. So really, what it takes to be a manager for folks like that is absolutely track record. Right. And so it’s like, you need to demonstrate that you know, what you’re talking about. So in this specific case, Angel Oak need to show that we are experts in mortgage credit. And that’s where our mutual funds came in. It’s like we’ve been managing non agency mortgage credit for at that point in time when we started the private credit strategies by seven, eight years. So we had our chops in our history that we know mortgage credit, and especially the non agency space. The second thing with institutional clients is that you have to have something that that’s, that sets you apart, right, what is your competitive advantage. And in this specific case of Angel Oak, it is our non qm business, right, it is something that they like they read about, they researched, and they are trying to find a way to invest, because the way you invest in private credit is you have to find someone who can get you the asset. So it’s very different than, say, buying an equity. Because as we all know, that’s an exchange traded product, if you want to buy 100 shares of Apple, you can buy 100 shares of Apple, right? It just depends on the price, with non qm and private credit, identifying the investment, but then being able to put money to work, those are actually kind of two different things. And so the institutions like Angel Oak go Come to Angel Oak, because a, they like the non investment strategy, but they also know that we can put their money to work.

Michael Chabot
Right? And prior to the housing crash, and you correct me if I’m wrong, but mortgage investment mortgage bonds, has as historically been a very safe and sound investment, correct?

John Hsu
Yes. And it continues to do so. I think we’re really where the market went wrong is I think we all know, as mortgage professionals is that just, there was an over extension of credit. Right? And, you know, people did game the system, right? So the, the, the, it’s not that the mortgage, or the industry itself was bad. It was just that there, there was just an overabundance of money chasing an idea. And then when that happens, it it could be mortgages, it could be literally anything, it could be tulip bulbs, right? As we all learn in school, like bad things happen when there’s too much money chasing an idea.

Michael Chabot
Absolutely. So let’s fast forward to today’s market. Because I know back then, you know, product was coming out coming out coming out in this market where Angel Oak is providing these non qm or as we say, non qualified mortgages. And for those of you that didn’t listen to the first episode, and john can correct me if I’m wrong, but a non qualified mortgage is basically just something that’s a non agency loan, right? That

John Hsu
does crap. It’s it’s, it’s an it’s an unfortunate name. I mean, it just sounds awful coming out of the gate, like we’re doing something that’s non qualified, right? So but it does, it does not necessarily does not mean it’s a bad mortgage. It just doesn’t qualify for an agency guarantee. So that’s really cool, which again, equates to non agency, right. So if you really wanted to cut it to its finest point, though, you know, a prime jumbo could be a non qm loan, because it’s not an agency loan.

Michael Chabot
Correct? Yeah. So. So I think what we want to know is for our listeners, because what this show is all about is, you know, we’re talking to consumers, we’re talking to real estate agents to builders, to anybody who has a share in the housing market in the United States is and we want to educate them. Why is it important for them to understand this about private capital Institute, institutional investors? Why do you think it’s important for people to understand this?

John Hsu
I think what the really fundamental shift that started Like right as the crisis happened, and then the years after with Dodd Frank, and the government takeover of the agencies, is that the government realized that the GSE government sponsored entities were at the time pre crisis. They were public companies, right? So they had stockholders they had they had executives, but there was there wasn’t supposed to be a guarantee from the government. But as we all learned, there actually was. So when the government took it over, and they realized that hey, they are format, they are performing a necessary task. They are they are giving liquidity to the mortgage market, but in a defined space, right, it should be like first time homebuyers, moderately priced house, right, not a multi million dollar house, not an investment property. Not someone’s lake house, right? Those those are obviously residential properties. But folks like that, who own a multimillion dollar house, or a lake or a mountain house, probably don’t need the government to help them, you know, get liquidity for their mortgage. So what’s going on is that there’s a fundamental shift, like I said a few moments ago, where the government agencies are having their footprints shrunk, they’re going to focus on their core mission when they first started. And again, that first time homebuyer that moderately priced house, right. And again, good credit. But the other things like like the second home, or a bank statement, borrower who’s not a W two who’s an entrepreneur, nothing wrong with that. Those folks probably don’t need the government, or they gscs to support their mortgage products. So but the interesting thing apart there is those borrowers aren’t going away, they’re still there, they still an entrepreneur, who works for himself, or even a graphic artists who worked for themselves. They wanted, they want to live and deserve to live in a home. But there isn’t a program that fits them. So private capital comes in and takes the place of the GSE. They say, Okay, I’m going to supply the mortgage mortgage to you. So I’m going to use institutional capital to create the demand for that mortgage. Because without that demand, the product doesn’t exist. And that’s kind of what we saw, from about 2007, to about 2013, when Angelo started doing non qm those borrowers like the self employed someone with a minor ding on their credit score that threw them out of an agency execution, they really had no choice, there was nothing there for them. So again, these folks never went away. The demand never went away the product and the demand for that mortgage, from an institutional perspective, that end user wasn’t there anymore. And that’s what private capital is doing now and going forward.

Michael Chabot
Great answer, by the way, and I think that, in my experience, I think that after the mortgage market meltdown that the self employed borrower probably got penalize the most Would you agree? Absolutely.

John Hsu
I mean, if you think about the mortgage market over the last 1315 years, right, it’s been all day you underwriting good old fashion, you know, crack, you know, crack open the loan file, you know, look at the guy’s tax return. And think about, you know, looking at self employed, there is no w two, right, it’s probably you have to look at the business bank statement, right? Or think of an entrepreneur with a lot of K ones, which are like these private investments. And then you think about the poor underwriter who’s been doing to you for 10 years, they’re like, Wow, this looks really familiar, but I kind of forgot, how do I do this again, right. So, um, you know, the, the self employed borrowers probably suffered the most, because, you know, they were deemed to be like business owners by big time business owners. But as the gig economy has evolved over time, it’s not like I said a few minutes ago, like the graphic artists who works for themselves, like that type of career path didn’t exist. 1315 years ago, there was a small number of people that did that, but now it’s a much broader part of the economy. So the the GSE type of mentality hasn’t evolved as quickly as the real market has, right. So the real labor market has evolved into a point where people are working for themselves more, but unfortunately, there isn’t that program that supports homeownership for them, but real until Angel Oak has stepped in with our bank statement program. Yeah, I

Michael Chabot
Yeah, I mean, I mentioned in the last episode as a loan officer, I’ve been in the industry for about 18 years. And it’s funny because after the market meltdown, I took a course on how to read tax returns again and go back and you know, because we hadn’t done it in so long as a loan professionals. We forgot because everything was done with d u, which is desktop underwriter. It’s, you know, and I liked that you talked about the gig economy, because I think, and I’m sure you would agree as technology continues to revolutionize everything we do, you’re going to see more and more and more of that. Would you agree?

John Hsu
Yes, I agree. I think it’s one of the one of the shifts that I talked about, again, one of the first shift was the shrinking of the GSE. footprint. I think the other thing that we’re seeing through technology, I think, I think, unfortunately, that the COVID crisis, you still that people can work remotely, they can work for themselves, right? Sometimes by choice, sometimes not by choice, but people are going to do what they need to do. And so that growth in the self employed bar people working for themselves, I think, is a growing trend. So I really think that the mortgage market needs to evolve, and meet the trend in the Employment and Labor Market as well.

Michael Chabot
Agreed, and correct me if I’m wrong, but when we talk about gig economy we talk about, I mean, there’s millions of different things we could say that fall under that definition. But I’ve used an example, I have a client who runs five different YouTube pages that are all about breaking down video games. And as a self employed borrower, he earns somewhere close to seven figures if you’re doing that. So the technology has created an opportunity. And I you know, I think and I would love to hear your opinion is the gscs, which basically are Fannie Mae, Freddie Mac, right? They are still underwriting the old school way, right? Two?

John Hsu
Absolutely. And, again, this is this is where, look, there’s not I’m not trying to make a statement about government or anything like that. But I absolutely think that if you think about when the GFC started, it was post World War Two, right? Baby Boomers, people coming back, wanting to settle into a normal life, just want to live a quiet, happy life, you know, have their own home is their castle, right? And people, the economy then was you worked for a big company, he did a good job, and you could provide for your family. That was the way it worked. And that’s where the gscs grew up. Right. And that program worked again. And that’s a governmental policy. So as we all know, governmental policy does not react overnight. It takes time. But the real world changes very, very quickly. Right? So it’s not a bad thing. It’s just the reality of the world, I think. But that’s where firms like Angel Oak step in and make a difference, right? Because we I have a very entrepreneurial spirit, we can see these trends, and we can take advantage of the opportunity. The marketplace presents itself, right? We didn’t cause the crisis. But we’re good students of history. We know that that non agency borrower never went away, right? their desire for homeownership never went away. The problem is that there was no provider of mortgages for those folks. So that’s where we’re coming in. And again, perhaps over time, the GSE is will evolve to meet that demand. But until then, that’s where folks like Angel Oak and with our private capital steps in.

Michael Chabot
Well, it’s a perfect segue into my next question, which is that is what differentiates Angel Oak from from most other lenders, and many people out in the market, and you addressed it because of the name it sounds scary non qm. A lot of people still think that non qm has very little, you know, regulatory oversight, that borrowers are exempt from, in our industry, what we call proving the ability to repay their mortgage. How do you answer that?

John Hsu
I think that again, the the name non qm is very unfortunate, but from from an underwriting standard of care, and oversight, it’s probably the tightest part of the credit market, in my opinion, for mortgage underwriting, because if you think about it, Angel Oak, and again, we may have touched on in a previous podcast, but we are a vertically integrated business, which means that our asset management business and our origination business are closely linked. And the asset management business on the private side is closely linked, the public side is totally wholly separate. We don’t do anything with the mortgage company. But if you think about what Angel Oak does, when we create the mortgage on the origination side, that credit risk never leaves the house. It stays under the Angel Oak umbrella in our in one of our funds for sure. But it never leaves. So if underwriting mistake is made, it is felt in the return of the fund. So from a standard of care perspective, it’s not like the the battle these the battle. These don’t exist anymore where a good loan is a loan that you could sell. Right? There were some very good things that came out of Dodd Frank. One of them is risk retention, right. So if you’re going to use the securitization market, if announce a pool of mortgages, you have to align your interest with the bond investment. So you have to keep a portion of the risk. The interesting part is, it’s called risk retention, the investors in our private credit strategies, that’s what they invest in, they want the risk reduction, they see it as a great investment. So whereas Congress and Dodd Frank, almost picked up package as a burden, other institutional sees an opportunity, right? Like, this is great, I get to finance this pool of assets. And it’s so unique. That’s so good and credit performance, I can’t get anywhere else. So it’s, that’s where it’s very different. So I would say the alignment of interests between the lending business and the asset manager business creates a standard of care that we must have. Because if we create bad credit, then the the asset management business and the returns suffer. I mean, there’s there’s no two ways about it.

Michael Chabot
I agreed. That’s a phenomenal answer, by the way. Excuse me. And I would like to ask you this question. It’s off. Its off script. But I want to ask you, because he talked about securitization, a lot of consumers don’t understand how how interest rates in the mortgage market are set. They don’t understand that even Fannie and Freddie takes these mortgages and securitized them and sells them as mortgage backed securities, you are much smarter than I am. And maybe I would love for you just to give your kind of, you know, 32nd kind of overview on how the market sets rates and what securitization means.

John Hsu
Okay, 30 seconds, okay, no. Okay, so this is the way I would start. So okay, um, the way that the mortgage, a mortgage rate, the interest rate you pay is set is really a result of a number of things. Right? So when you when you think of what Angel Oak does well, right, we’re good at origination, we’re good at raising capital in the private capital base with our institutional investors. But we also the third leg of the stool is our capital markets effort. And what what do I mean by that? I mean that what we’re good at is we understand the value of the mortgage that’s created. How do we know that value? Because we know who the end users are, right? Meaning our limited partners, and our funds demand a certain return. Okay. And then the bondholders and our securitization demand a certain return for the amount of risk they’re taking. So we can I don’t say it’s a simple math exercise, but it is a math exercise nonetheless. And we can say, Okay, if these are the return requirements, from the bondholders from the risk retention slash equity holders, we know that the mortgage has to be priced at this level, when it’s sold to the mortgage. So when sold from the mortgage company to the fund, with a specific coupon rate, we can do the math and figure that, okay, we’re going to sell it at this price. And a coupon has to be x instead of at a different price. And the coupon has to be why. So that’s how the price is determined. And that’s how we do it a non qm and exactly how the mortgages are produced in the agency side. Because the agencies do securitize this stuff. And they and it’s such an incredibly well, traffic space. everyone buys every fixed income, institutional manager has an agency allocation. And there’s such large volume, it’s as close to a true marketplace as possible, because it’s such a ton of volume that flows through there, there’s very clear price discovery. In non qm, the exact same thing happens just to a lesser degree in volume, because we’re just not as big as the agencies. But it is basically the rates are set because the end users, the end holders have that mortgage risk, so to speak. The combination of all their desired returns really drives the coupon required on the on the underlying mortgage side. I hope that made sense.

Michael Chabot
JOHN, I have to tell you in all my years, that’s the best answer that I’ve ever received. That was phenomenal, easy to understand, laid it out perfectly. I’m going to just take this, make it a video and send it to all my clients because it was just you did it. So well. Thank you. And I know that was off script, and so I apologize, but now. Excellent, excellent job. One of the questions that that we hear a lot, and we’ve already talked about non qm being the scary, a lot of people feel like well is non qm leading us back to subprime. And I would love for you to answer that question.

John Hsu
I would say just off the cuff No, because I’m The last all of our securitizations, just if you want to look in my definition, subprime very simply is FICO score, right? It’s also in the battle days, stated income, you know, stuff like that, like, different appraisal has nothing to do but just those two alone, first of all stated income prohibited by law, right? The ATR that we touched on earlier ability to repay, like, we have to make sure that every single loan has an ability to repay. If not, the borrower can come after us, the lender and say, Hey, you get it, you gave me a loan that you knew I could not afford. Today, we’ve never in the $10 billion plus that we’ve originated, have never had one borrower come back to us after our default and say, Hey, economist led me here, and you knew you put me into a mortgage I couldn’t afford. So that speaks for itself. Yes. But then going back to the FIFO or FIFO, in our securitizations. And I say securitizations, because it’s basically if you create a non qm mortgage, it goes into a securitization. Sure, over time that FICO score has actually gone up. Okay, it started in the LO like, 704705, it’s probably about 715 at this point, right? So that is clearly not subprime for a FICO score perspective. But then I also point back to the documentation, the stated income stuff, like the bad stuff, direct net gam those don’t exist anymore. So that were those were kind of the hallmarks of the bad subprime. It’s not the hallmark of non qm today. I would also say that, you know, outside the, the, the self employed, I think the truth under 640, subprime borrowers have had a tough time too, right now, no, Jenny has kind of stepped in and taken care of that. But, you know, those are the folks, those of the folks that, you know, Ginny’s become the new subprime lender, right? We’re, we’re just servicing the other non agency part, right, the higher quality non agency part. So I would draw a distinction, that, again, what we’re seeing is just an evolution of the mortgage market, right? Because if you ever think oh, we’re just gonna, you know, wait it out, and the good old days are gonna come back. No, it’s it. Everything evolves over time, right. So things are evolving. And the non agency mortgage market is now evolved, I believe into where like a genie is kind of like the non sorry, the subprime borrower, and then private capital is taking in the more higher quality non agency.

Michael Chabot
Yes, and we don’t want the good old days to come back because there was too many loose guidelines, irresponsible things happening, not only for us as lenders as a company, but also for the consumer. None of us want it. We don’t need that.

John Hsu
I was being facetious when I said good old days. I mean, there really weren’t they were really the bad days. Right? Because like, were they were still paying the price, you know, 15 years later, for for stuff that happened back then.

Michael Chabot
And it’s it’s unfortunate, but some some loan originators that do the job I do they still long for those days, because the job was a lot easier. You didn’t actually have to work right? It was, I joked, I joke with clients, you know, Gone are the days where you fog a mirror and you can get alone, you actually have to prove that you can repay it.

John Hsu
And like I said, I think there were a lot of good things that came out of Dodd Frank, that risk retention is one of them. I think the ATR is insane, it was a extremely good thing that comes out of it too. So that makes a lot of sense, right? It creates guardrails, that creates a floor that you can’t go beneath guardrails that you should not deviate from. It’s simple stuff. You know, I remember when we first did non qm, most of the underwriters we’d hired who were just kind of like, coming back they’re like, I have no problem doing this type of underwriting this manual underwrite, you know, the five pillars of credit are like we’ve I’ve done this my entire career. We just kind of deviated for a few years in the middle 2000s and one crack, but this is what I’ve always done. So I have no problem going back to what I’ve always been doing.

Michael Chabot
Well, and what I like is, you know, Angel Oak is doing loans that make sense. They’re loans that make sense, they fit a need in the marketplace. And so, this goes into my next question is, where do you see this segment of the market moving forward? The next one, three to five years.

John Hsu
Do you mean the non qm? Yes, sir. Sorry. It’s, it’s a great question. So like, if you think about non qm it’s a probably four different programs, kind of math. into one name non qm. Right? There’s, there’s good old fashioned there’s there’s the bank statement. There’s the investor property. Yep, there’s the true non prime borrower. And there is that just miss prime guy getting just minor glitch in his credit, you know, do you get thrown out of prime execution, right? Yeah. Right now the volume in all those four are not great enough, where you can do a singular securitization of just investor property. Actually, that’s not true, we see we have seen that, but not at any great value. It just just bank statement or just just miss prime or, again, just good old fashioned nonprime. What I think you’ll see over time is as as the market develops, and normalizes you’ll see non qm split off into those different programs. So I think what’s what and the reason I think that’s even mentioned that is because as the mark marketplace likes to select its own risk profile, meaning some borrowers, some investors in our securitizations are forced to buy all of non qm because that’s all I have. But I’m sure someone would be like, I would like maybe any given point in day in the week, I would like more of the bank statement risk than I would the non prime risk. Now I be buyers of both, but I might price them differently, right. So by giving the end user investor a choice in what they want the borrower or actually get a will accrue the benefit of that. Does that make sense? So yeah, because it because we’re mountain amalgamating everything into one thing. It’s like, Okay, this is kind of a vanilla chocolate strawberry mixture of ice cream, right? But if you allow people to say I want vanilla, I want chocolate or I want strawberry, right before it was ice cream. And now it’s different flavors. Like, oh, yeah, you know, maybe more people like vanilla than they do chocolate. Who knows? But that’s what’s kind of going on right now. And I think that’s where I think you’ll see the market move in the next couple of years.

Michael Chabot
Not gonna hold you to this, if you had to guess what would you say is the percentage of non qm loans being done in the mortgage marketplace right now? It’s just a guess.

John Hsu
Out of total production? Yeah. Oh, man.

Michael Chabot
5% 2%?

John Hsu
Um, I would say it’s tiny, tiny, I would say it’s probably 1%. Who said, okay, because I think the market we’re chasing, like pre crisis. So the motto we’re chasing pre crisis was probably 10% of the market. Yes. Right. And right now, we think the market opportunity is 10 times what we’re doing today. Wow. So that’s, that’s how I got to, you know, it should be 10. It’s probably one today.

Michael Chabot
Right? So. So that’s the goal is or that’s, that’s the forecast. As you guys think moving forward in the future, we’ll get back to about 10% of the entire originations in the marketplace.

John Hsu
Yeah. So I mean, if you think about Angel Oak, and the non agency, so I’m going to switch now to using the term non agency. Sure, I think a healthy market that are investors in the asset management side would be interested in that marketplace is probably about $250 billion per year in production. 2019, I think was like a high watermark, this is pre COVID of total market size, that’s about 25 billion. So that is a 10 times multiple in terms of opportunity size. So for all of your listeners, right, referral sources, borrowers, real estate, whatever. The marketplace is probably 10 times what should be in a healthy market, normal market supply demand by 10 times the size of what it is today. So I think it’s a great opportunity for someone to learn more about the program, ie the mortgage program to say, Hey, you know, there are still a lot of borrowers that are underserved. There are still a lot of referral sources that don’t even you know, don’t know the full story, again, may have misinterpreted non qm DB subprime. It’s not you know, I ran into someone during my high school reunion a couple years ago. I won’t tell you which high school reunion it was, but you could probably get and he goes, Oh, Angel Oak, you do those kind of crazy loans. I’m like, you know, are just throwing it out there. Our cumulative loss rate is 10 basis, less than 10 basis points. Wow. That’s pretty darn good. Yeah, well, You know, I don’t know what how you define crazy. Right? That doesn’t seem real bad to me. But I mean, again, the MIS perception, right? So for the for the folks listening to this to this podcast, I think the taking the time to learn about the programs and trying to like, integrate it into your day to day conversation. You know, it’s, it’s a great benefit, because what is the next time we’re going to see a TEDx opportunity in terms of volume growth? I just don’t see that. I don’t see that coming about every day.

Michael Chabot
No, I don’t either. And it’s, it’s really, Angel Oak really has differentiated itself from everybody in the marketplace. It’s, I’m having fun, you know, because now I’m working with at Angel Oak as a loan originator, and I’m having fun in the business again, because I’m able to help people who sometimes feel hopeless, because nobody can help them. And it’s a lot of fun when you can help somebody who’s been told no, and they come to us. And we can say, Yes, we can help you. And here’s how. And I know, we’re not allowed to talk interest rates on this show. But what a lot of people don’t understand is that these products, excuse me our pricing. Pretty darn good. It’s not like the old stuff back in, as we said, the battle days where I really like to say, and you correct me if I’m wrong, non qm is really kind of like the old alternative doc days, right kind of all day we used to call

John Hsu
It that’s really it’s, it’s true. It’s what all a was created to be.

Michael Chabot
Correct. So anyway, I just, I think it’s a great opportunity. I think there’s so many opportunities in the marketplace. I love that we’re serving a section of the marketplace that needs help, desperately, and we can do so with so many wonderful products. The last question that I have for you is, Are there plans? And I know you can’t speak specifically, but are there plans on the horizon for additional products to continue to analyze the market and come to the you know, meet the needs of the marketplace?

John Hsu
Well, thank you for asking that question. Because it is actually real great segue into what we’re talking about. So few minutes ago, I talked about the kind of like a kind of a seismic shift between what the agencies are doing and what they used to do and what they’re evolving to become a couple examples I can use I can show you is, or I can talk to you about our different programs like agency high balance, the non owner occupied delivery cap, right. So when you think about they may not be new products, per se, right. But they, you can see that the agencies are have a limited appetite. Now you’re you’re seeing that there’s gonna there’s something going on where it’s like, they’re just waving stuff in. Yep, yep. So that’s all I’m a buyer, I’m a buyer. So from an opportunity set perspective, again, I point back to Angel Oak Capital Markets effort, I think what you’ll see going forward is because we’ve done such a good job on the non qm side, or the non qm segment of the mortgage business, the institutional clients that we’re in touch with, right, have an allocation have a much bigger allocation for agency like product. Now that we’ve done a good job in a tough the tougher part of the credit segment, in their opinion, the tougher part, we’re going to go back and say, Look, here are some great mortgages that have fallen out of the agency execution. It’s the same mortgage you bought last month, but at a slightly more attractive price coupon, what have you, right? And what we’re going to be doing is showing these investors, these new opportunities, again, sourcing, right, so you heard me talk about sourcing earlier, as an advantage and asset management. So here, we’re going to be sourcing investments for these institutional clients, it’s going to allow our loan officers to be remain competitive, because we are just not delivering that agency loan to the agencies. We will continue to do that, of course, but we have other outlets. And depending on the appetite, remember, maybe this guy likes pistachio ice cream, right? Right. And we can deliver that too, right? So now we’re just right. So this is what this is where Angel Oak will is evolving into matching, really matching the desires of the investing community, right, the end holders of that mortgage credit. We’re in touch with them. And then on the origination side, we’re in touch with the folks who need credit, right who need the credit extension. So now, we will be in the middle and say, oh, there’s a need on the borrower side that looks like this. We call our good friends on the investor side and say hey, do you have would you like this? type of credit risk for you for your investment portfolio? Yes. Also, because I know a great place where we can get that. Yeah. Right. So that makes us more competitive as a firm. That’s what makes our loan officers more competitive because we are finding these solutions. So I hope I answered your question. But that is a great evolution of what Angel Oak is going to become?

Michael Chabot
Phenomenal answer to that question, exciting answer to that question. And, you know, I’ve so much great stuff today, you make these really difficult technical things seem really easy to understand. So thank you, you do a great job of breaking it down. And making it to where even you know, those of us that have been in the business a long time, all the stuff that happens in capital markets, and secondary and all that stuff, we understand it, but at a very, you know, low level, whereas you really explain it really well. And thank you, our listeners really got a treat today, John?

John Hsu
Oh, thank you. Thank you for inviting me.

Michael Chabot
Yeah, I’m excited. And I don’t I want to be very respectful of your time. I just really look forward to see where Angel Oak goes here in the future, and how they continue to help the market grow. And as you said, there’s a 10 times growth that that we’re looking at here in this marketplace. So there’s a lot of opportunity. And john, I just want to thank you so much for coming on the show today. And we look forward to having you back again in the near future.

John Hsu
Love to have the conversation love to talk about what we do and if the next 12 years or anything like the last 12 years. We’re in for a fun ride.

Michael Chabot
So I’m gonna I’m a hockey guy, I’m going to leave you guys with a quote. So Wayne Gretzky said it best to good hockey plays where the puck is a great hockey player plays where the puck is going to be and I believe that’s exactly what Angel Oak is doing in the mortgage marketplace. Would you agree john?

John Hsu
I totally agree with you i totally agree with you because like I think we are we we have a we feel we have a very good idea where that evolution is going to go and we make our business plans to try to meet that mortgage mortgage evolution like meet them they’re not follow them. They are meet them.

Michael Chabot
Agreed. Well, Hohn, I thank you so much. Again, ladies and gentlemen, John Hsu. Just a wealth of knowledge. I learned a lot on this. I know everybody listening to this is gonna really enjoy it. And I just thank you for your time.

John Hsu
Anytime. Good talk.

Michael Chabot
Alright guys, if you like this, share it, tell your friends about it. And we’ll get back to you soon with our next episode. Thank you so much.