Who Is Angel Oak And How Are We Revolutionizing The Mortgage Industry?

Who Is Angel Oak And How Are We Revolutionizing The Mortgage Industry?

Welcome to our very first episode of Your Mortgage Matters with Angel Oak Home Loans!  We are a lending powerhouse helping borrowers purchase and refinance who didn’t think it was possible. Realtors have increased their earning potential working with us and selling more homes to more people. How? Listen to the episode!

Managing Partner of Angel Oak Lending Steven Schwalb tells you our story of how we revolutionized the mortgage industry and continue to do so today. Tune in to find out what we do and why we do it. Years ago we saw a huge population of credit-worthy deserving people shut out of getting a home loan – and our leaders set about to fix it.  We accomplished that and MORE. It’s quite a story. Listen and find out why we are unlike any other lender out there and WHY this matters to achieving your goals whether you are a borrower, Realtor, real estate investor, builder or anyone interested in the mortgage industry. Thanks in advance for tuning in!

Welcome to our very first episode of Your Mortgage Matters with Angel Oak Home Loans!  We are a lending powerhouse helping borrowers purchase and refinance who didn’t think it was possible. Realtors have increased their earning potential working with us and selling more homes to more people. How? Listen to the episode!

Managing Partner of Angel Oak Lending Steven Schwalb tells you our story of how we revolutionized the mortgage industry and continue to do so today. Tune in to find out what we do and why we do it. Years ago we saw a huge population of credit-worthy deserving people shut out of getting a home loan – and our leaders set about to fix it.  We accomplished that and MORE. It’s quite a story. Listen and find out why we are unlike any other lender out there and WHY this matters to achieving your goals whether you are a borrower, Realtor, real estate investor, builder or anyone interested in the mortgage industry. Thanks in advance for tuning in!

Michael Chabot
Hey guys, welcome to our very first episode of Your Mortgage Matters brought to you by Angel Oak Home Loans. I’m your host, Michael Chabot. And with anything new, it’s always good to start from the beginning. And we have quite a story about how Angel Oak became a powerhouse. And why are they behind this podcast and bringing this to you. Angel Oak revolutionized the mortgage industry and they continue to do so. I can’t think of a better person to tell Angel Oak story than managing partner of Angel Oak Lending, Steven Schwab, they saw a huge population of credit worthy deserving people shut out of getting a home loan. And the leader said about to fix it. The company was born from that. So with that, we welcome Steven Schwalb.

Steven Schwalb
Hello, Michael.

Michael Chabot
Thank you, Steven. Welcome to the show. And let me give a little background and your bio everybody knows what you’ve done and where you’re from. So Steven again is the Managing Partner of Angel Oak Lending entities. His responsibilities include the development of Angel Oak Lending and servicing strategic plan, oversight of the origination and servicing platforms and executing growth opportunities and agency approvals, servicing and securitization. Steven co founded Angel Oak Mortgage Solutions, a non agency wholesale and correspondent mortgage lender, and Angel Oak Home Loans, a residential agency and non agency retail lender. Under his leadership, Angel Oak Lending has broadened its product mix and now originates over $4 billion of loans. Angela, Stephen has more than 25 years of experience in residential lending. Prior to joining Angel Oak, he was the senior vice president of capital markets at cell star funding a nationwide wholesale mortgage lender specializing in non agency mortgage products. His primary responsibilities included product development, risk management, operations and Investor Relations. Steven holds a BS degree in finance and an MBA from LSU. Go Tigers, right?

Steven Schwalb
Absolutely. Go Tigers.

Michael Chabot
Steven, welcome to the show. I know that was a long bio, but you’ve achieved so much already in your career. And it’s a real honor to have you on the show today.

Steven Schwalb
Hey, Mike, I can’t thank you enough for including me on this podcast.

Michael Chabot
Yeah, it’s gonna be a lot of fun. And you bring a lot of insight to, to the industry. And of course, what Angel Oak is doing and how it’s revolutionizing the industry. So I think we start from the beginning, which is how did Angel Oak start?

Steven Schwalb
That’s a good story, as most entrepreneurs will tell you, Michael, whenever you start something new, there’s there’s always a good story behind it. And there’s always a good story as you as you grind and you build an organization, and then you can look back and take a lot of pride in what you what you’ve done. But to answer your question, Michael Angel Oak originally started to capitalize on the legacy non agency MBs otherwise known as toxic assets back in 2000, to that 2007/2008. So we were all in the business back in 2007. Well before, but we saw the run up in, in marginal credit standards. So you had a run of a marginal credit standards on behalf of the originators on the capital market side, Michael, you had I can’t buy enough, I can’t buy enough, produce more, produce more produce more, which caused integrity issues with just the fulfillment of residential mortgage loans. That’s what we saw create the economic downturn 2007/2008. And that’s when the toxic assets were trying to get offloaded by bank balance sheets and insurance companies because everyone was terrified at it. Well, during unfortunate instance, there were always there’s always another side to it an opportunistic side, where we coming from the mortgage background. Well, originally, Mike fierman, who was one of the partners that southstar funding. Well, Mike met up a trainee private trainee was over at wamu at the time, and running the book over there for those guys. And where sriti new capital markets, a true expert at capital markets and understanding bonds and bond structure might the same on the residential lending side, true experts and credit, credit behavior, and, more importantly, the guidelines. And when she zones her book, that they had a really good understanding of the collateral behind the bonds that were called toxic assets. And the two of them thought how great would it be if they could raise some money and lean in and participate and buy as much as as collateral they possibly could. And so that’s what they did. They went around the rates of money, I was fortunate enough to be one of the first investors on on the fun side, as well as being able to participate on the partnership side of Angel Oak in a small way compared to my company. And so they saw a great opportunity and they did that they took the risk, but they It was a very calculated risk and they bought as much as collateral they could during the financial crisis? Well, when you buy loans or bonds, Michael at 30 cents on the dollar, 30/35 cents in dollar, it doesn’t take a whole lot for those loans for those bonds to perform and perform for the, for the for the fund investors. And they performed great. Fast forward four or five years later, when the strategy when that initial strategy started to taper off, these bonds start amortizing down, are they able to sell these bonds at close to par value. So if you think about when you buy a loan, a bond that inexpensive the annualized returns you get, and then the return when you settle out the bond portfolio at such a high level that that calculates to be big numbers. And, and that that’s really where my countrymen made made the bones. During that time, Michael, Michael Trini, also realized that there were no more non agency loans from not sorry, non agency bonds being originally created. Because there are no more non agency loans being originated, we all remember what it looked like Fannie and Freddie had to take over the world. And no one other than Fannie, Freddie, were making residential loans. So I thought, how cool would it be, if we were to start up an originator to go out and originate these loans? And that’s, that’s when I was fortunate to get the phone call, ah, wow, a bunch. Come on over. You’re a mortgage dude, come do what mortgage dude do. And let’s build something to have some fun. Yeah. And it’s been fun ever since. So, I was fortunate enough to be a part of my country’s vision to create presidential non agency residential bonds, again, by being the guy who sources these rounds. And it’s been it’s been an absolute blast ever since.

Michael Chabot
I love it. So let’s break it down a little bit. Let’s go back, you gave us some great tidbits. And I want to go back for those listening, that that don’t maybe understand all the terms of our industry. So capital markets, but I want to talk about some toxic assets. We’re talking about what everybody heard of in the news in 2008 2009. Right, subprime typically, right, yeah, loans that that had very loose underwriting guidelines in them. For those of you listening that don’t know the mortgage industry inside. Now. There’s certain things you have to qualify a typical loan, you know, it’s bank statements, it’s w twos, it’s pay stubs, it’s tax returns, we got into a market where so we got into a market where what what we joke about as loan officers is you had to fog a mirror, if you could fog the mirror, you could get alone. And but what I want you to do is break it down and talk about so. So tell people listening who don’t really understand the inner workings of our industry, what capital markets are.

Steven Schwalb
So capital markets are those avenues in which the loan originator and the loan origination companies will sell the loans after they make. So the vast majority of loan originators or mortgage companies out there today, they don’t hold on the phones, in fact, very few affinia actually hold on to the loans. They actually, quote, get the loan in, process the loan, close the loan, and in turn around, sell that into capital markets. So you can think of capital markets are pension funds, insurance companies, Wall Street firms, they like to buy the loans in the form of bonds. And so you get companies will buy all these loans in typically a wall street type firm. They’ll take all the residential loans, and they create bonds that the process is called the securitization piece. So they do a securitization. And from the securitization, Michael, they have different tranches of bonds in those different trenches of bonds will be sold to investors, once again, the insurance companies banks will have different risk appetites, depending on their risk appetite is what what tranche a bond they’ll buy from that securitization. And that’s, in a nutshell, what capital markets look like, and what the investors look like, what happens with nation?

Michael Chabot
Yeah, and so let me ask you on that, and I know we’re going a little off topic here. But in regard to that, when they when they set up these bonds, and the different tranches that they set up, do they do they set them up price wise based on risk meaning credit score down payment, those different criteria?

Steven Schwalb
They do. So if you think about a bond, Michael, on how these bonds are structured, it’s, it’s it’s the risk from a pool of mortgages. So you can have a pool of mortgages, whether they were subprime or whether they’re near agency, or whether they’re prime jumbo and and there’s a risk level off that pool of mortgages. And so, if I’m a what’s called a senior buyer, or, or a buyer, that buyer buys the least risky piece, I’m going to get the lowest rate of return for the bond that I buy, because that bond will be the last bond that takes losses. Got it inversely, if I buy what’s called the riskiest piece or the equity piece, that can be the very lowest tranches of bonds, well, that bond is gonna return a much higher interest rate to the investor, because it will be those bonds that take the losses first. And so the loans that the bonds that take the losses first from loans going into foreclosure or prepayment penalties, those guys have to be compensated for the risk that they’re taking, which has a higher interest rate. Now that we’re on that piece of it, Angel Oak believes in the risks of the risk of the loans that we originate. So we love that risky piece of the bond, because we understand the borrowers and create our own guidelines. Whereas the least risky piece of the bond will work. We have insurance companies and big money center banks participate and buy those bonds from us, after we do the securitization, from the loan from which we originally.

Michael Chabot
Right. And so, and thank you for that, that is exactly what I wanted for our listeners. And let’s go back and talk about so just to get a little deeper. And again, set the table for listeners is, as we all know, because we all live through it. We went through an area what I call, you know, kind of drunken lending, right? Where everybody got alone, and it was it was good times. And then everything changed, equity stopped going up, people started losing homes, and you guys really came in and rescued the industry. Right. And I think I read that. In the beginning, a lot of people doubted what you guys were doing. Correct. Isn’t that right?

Steven Schwalb
That’s exactly right. Michael, a funny story. As I said, originally, when you’re an entrepreneur, and you start these new businesses, and you go to the market with these new ideas, people often will look at you like you’re crazy. And there were many times we would go to investors and ask them to put money into Angel Oak so that we could originate these loans. And they looked at us like we were absolutely nuts. Like, whoa, wait a minute, guys, we seen this movie before. So it was it was fun trying to convince these people that we actually know what we’re doing that we were going to treat them like we should.

Michael Chabot
And I look at you guys as visionaries, because you stepped in at a time when really everybody was running away from the mortgage industry. Nobody wanted to buy loans. That’s basically when Fannie and Freddie came in and saved most of the marketplace. And so I think what you guys did is revolutionary, and that kind of gets back in, you know, what I want to talk about next is, you know, since that point, and I guess, really the market fell apart in like, 2008. Right, that was kind of the bottom

Steven Schwalb
2008.

Michael Chabot
Yeah, yeah. 2008. So let’s talk about how Angel Oak has evolved since you joined the company. And then obviously, we can talk for hours about what’s what makes Angel Oak unique?

Steven Schwalb
Sure. So I joined the company in 2010. That was when my country turned from the strategy of just buying bonds, to saying, hey, maybe we should go out there and originate these loans. That were basically the baby thrown out with the bathwater that Fannie and Freddie won’t touch because they’re doing their Fannie and Freddie thing, no one else to buy these loans. Because if it couldn’t get sold to Fannie and Freddie, why bother? Well, we had the ability with some of the people who invested capital into Angel Oak funds to go out and, and originate loans that don’t meet Fannie Freddie boxes, but are good borrowers. You know, we initially said, No, bad things happen to good people. And good people deserve a chance at credit and homeownership. So as we talk about the strategy, Michael, it wasn’t necessarily the financial benefit of what Angel Oak was gonna bring. to us. It was really more as people who understand mortgage credit, what opportunities we could provide those who weren’t getting provided it from the Fannie and Freddie. Sure. So so we relished in the fact that we would see people buy homes and be able to move their families into homes no longer have to rent. We love the idea that three, four years later, they will refinance into an agency agency loan. That means we made the right credit decision initially. But more importantly, Michael, it really, really our mission was to help people who weren’t being helped at the time. Because if you think about a family with the children, they deserve a chance, right? As long as as long as their credit proves through and the underwrite them to the right to the right guidelines. And so that’s really the foundation of the lending. And what we did. The bond piece was the opportunity to buy the creating these guidelines and create an Angel Oak to originate residential loans was really more to how can we help communities How can we help people left out of the housing finance world?

Michael Chabot
Yeah, and it’s at a time when, as you said, earlier, it’s at a time when private money pretty much disappeared from the marketplace.

Steven Schwalb
But there was none. There was really none. We started up the originators specifically that we could capitalize and capture and provide fund home financing to these individuals. And anyone who has started a mortgage company can tell you to get warehouse lines, compliance, get state licensing, and to get HUD approvals. I mean, we can just go on and on. It takes a long time, Michael to do something like that. Yeah. So that’s why we started in 2010, to be able to land in 2011, which we did, we had to go slow, because still, we’re trying to get some investors comfortable with what we were doing. We booked $10 million in loans, those loans performed Great Investor said, Go get some more, we’re really liking what we’re seeing. And so that that was the catalyst to us growing our origination platforms.

Michael Chabot
You know, it’s you brought up a good thing, which I love this stat about the company, which is the loans that we’re doing are performing extremely well. I read somewhere and you can correct me if I’m wrong, but our loans are performing right along with Fannie. Freddie, is that correct?

Steven Schwalb
Our loans are performing right along with Fannie and Freddie. And it’s impressive, and and Michael, going back to the story of Angel Oak, at first, we closed our first 10 million, and those were servicing those loans. And then we closed more, and then we close more, and then we close more. And we got to where we were going to do our first securitization, back what we’re talking about previously, we’re going to create bonds and sell in the marketplace, and the securitization process. And so we went to the rating agencies, who we’ve been very transparent with since day one of Angel Oak. We went to the raid, he said, Okay, guys, we have this group of $300 million worth of residential mortgage loans, not defending credit guidelines. And we’d like to do a securitization, we would like for you to rate to securitization. Now, the important part is for the big money center banks, and for these insurance companies to buy these bonds, they have to have the stamp of approval by rating agencies, otherwise, the stage or Moody’s and s&p those type of REITs. So we wouldn’t talk to those guys. It’s great, great, do it. We’ll write these bonds for you, Steven, but we have to benchmark them to the last securitization ever done. Much like appraising a house, they had to look at the last house sold to get an idea of the value. And so then when we realized that the last house sold, that last bond created was during the financial crisis, and that thing just went sideways. No, thank you. So we will have to keep our job. And we didn’t want the investors to fire us. And so we did what was called a private transaction. Then we took the performance of these loans at that transaction, took them back to the rating agencies and said, Okay, now it’s time, we’ll give you a good rating, because we have some experience on you guys. So it was it was very fulfilling to get to that stage. And last but not least, the reading of our bonds couldn’t get the ratings that a Fannie and Freddie bond got, because they, they, these notes had never been tested to economic turmoil. Got it, they never saw a massive economic issue. That way, they would know how these borrowers are performing economic stress. Got it? And so the pandemic hit, yep. The pandemic hit our loans, are loans, performed, our loans recoiled and recovered, just like the agency book, close to the agency book. And now, what what we always say is, look, what doesn’t kill us makes us stronger. And everyone else does that. Well, now we are able to go back to the rating agencies and our bond investors say, Okay, look, I don’t know what bigger financial downturn or economic stress, no one’s gonna have our loans performed. That’s go. And so that has really helped us propel the performance of our securitizations into the stratosphere. Right. So now it’s now it’s no holds barred, it’s time to go.

Michael Chabot
I want to go and thank you. I love this. I want to go off script for a moment because I want to talk I think it’s important for anybody who’s listening to this, who doesn’t know the inner workings of the mortgage industry, right. So there are I just want to talk quickly about what makes Angel Oak so unique. So there are depository lenders, right? You’re big banks. There are and you probably have a better name for that. There are correspondent lenders, there’s mortgage brokers on the wholesale side. I just want to take a moment. And maybe you want to just describe very quickly to our listeners, each one of those entities and then why we’re a little different than everybody else.

Steven Schwalb
Sure. So the moral to the story that I’ll come eventually come to here is Michael at the end of the day, and I’m gonna walk through that process. I’m going to walk Up to each one of those investors for you. But at the end of the day, my hopes is to that everyone see? We’re a fully integrated, fully, fully, fully vertically integrated residential lending company. Yep. But But let’s let’s back up a little bit and go to your question, your original question, a bank. So let’s talk about a bank and a bank trying to do residential lending. So a bank is massive. And when a bank does residential lending, they have to make sure everything is exact, and the board members of the bank and investors of the bank are okay with everything. Once the board and the bank themselves are comfortable with any kind of risk profile and lending, then they have to get the OCC or other bank regulators comfortable with what they’re doing. Right. Those bank regulators fulva, further will put liquidity guidance on a bank’s balance sheet. So what I mean by that is, if they perceive a mortgage loan being riskier than a typical Fannie, Freddie prime jumbo loan, well, they’re going to make that bank hold more capital against the risk of that loan going back. So that will get to a point where it’s so it’s not economically viable for a bank to originate loans, plus just the whole compliance, and everything that they have to do to ensure integrity of the loan, it’s very hard, because remember, a bank has to do massive scale. And they have to have a broad breadth of residential products, it’s very hard for a bank to do that. Sure. And plus, as I said, the regulatory environment for bank is extremely stringent, typical residential lending correspondent will there that guy we talked about first, the podcast, Michael is there, the guy that will go out, close the loan in their name, then take those loans up, take those loans, after they’ve closed onto a warehouse line, package those loans up and sell them off to the secondary market. So they don’t own the risk of those loans. Right, they’re in the business of getting the borrower in the door, getting that borrow bank and selling the risk or selling that loan to someone else, who will then hold that loan for the lifetime, then you have a mortgage broker, a mortgage broker is, is a different different story, there were a mortgage broker will find a borrower, and he’ll bring it to a wholesale lender, he’ll give that borrower to the wholesale lender, coach that borrower through the process, and the wholesale lender will eventually close the loan. And once the wholesale lender closes, then they’ll sell it into the secondary market. The previous to the correspondent lender, no, and the court and the whole wholesale or the broker, Michael, they don’t own the risk of the mountains in which they originate.

Steven Schwalb
Where we are different from a bank. First off is we we have a lot of regulatory burdens that we have to we have to address and we have to adhere to. But at the same time we’re privately owned. So we’re a couple of residential guys that really understand the world of residential lending and credit risk, coupled with another fella who is really understands the financial markets and understands bonds and structured financing, and how that works. And so we’re we’re pretty, we’re very entrepreneurial, and the fact that we know what loans to bank that are going to perform. And so if these loans perform well, then the bonds performing the bonds will sell at a good premium. And so it’s just a couple of guys who use a lot of resources to ensure integrity in both the guidelines and the origination process of our loans. Once that happens, Michael, we then own the risk. So as we were talking about earlier on the whole securitization conversation, there will be the riskiest piece of the bond and the piece, it gets hit with delinquency and default first, and then there’s that piece get hits last? Well, we want the piece that gets hit first. Because we don’t believe that there is any kind of structural issues with that piece. Because we originate around loans. We have our own credit vetting process, we have our own originators out in the field who ensure integrity into the borrower. And we also put great guidelines out there that we know the borrowers can perform. So although our guidelines don’t look like Fannie and Freddie guidelines, we still have all the confidence in the world and the guidelines that we have to bank those bars for those bars perform. Yeah, so that’s, that’s, that’s, that’s Angel Oak. So at the end of the day, and in summary of this, this piece of the segment is that we are fully vertically integrated into these, these these mortgage loans, and we own the risk. So who better out there to do a loan that’s going to hold the risk, who better to be confident in originate these loans and the last thing, big benefit, we get Hear Michaels because we own the risk. And we sell all these loans internally, we can be more flexible when that borrower comes in the door. Sure. So we have set guidelines. And if the borrower doesn’t meet those set guidelines, if there’s good compensating factors in there, and our risk group feels comfortable with that loan, so be it. We’ll close out none, and we’ll get that borrower an opportunity to try.

Michael Chabot
Great stuff. By the way, you you answered my questions perfectly. And I want to this is a perfect segue into so Angel Oak does the agency stuff Fannie Freddie, they do FHA, they do VA loans, right, they do prime jumbo loans. But I really want to talk about what’s called non-qm. And for those people not not familiar with the lingo of our industry, it just means non qualified mortgage. And I’ll let you Steven, kind of break it down. And I don’t want to talk about Excuse me, I don’t want to talk about product specifics in this episode, but just kind of talk about non qualified and how it’s changing and revolutionising the industry and how it’s helping more people qualifying and buy homes.

Steven Schwalb
So, to your previous point, we are a full service lender. And so you haven’t heard me discuss non-QM securitizations, you’ve heard me talk about residential securitizations. And so we are all things residential credit. And we’re experts at all things residential credit. And in that boxes, Fannie, Freddie Ginny prime jumbo, and the non qm that we’re talking about. So let’s funnel it down to the non qm. So I can answer the question your specific question there. Sure. So non qm was created back in the financial turmoil. 2010 2011 2012. Right. That’s when the legislators and regulators came in and said, You know what, we’ve got to fix this to where this doesn’t happen again. And Dodd Frank was the law or the bill that came out to say, Okay, any loan that doesn’t meet Fannie and Freddie’s criteria has to be a non qualified mortgage. And if you make a non qualified mortgage, well, then the lender is susceptible to certain legal ramifications to the borrower. Correct? Basically, Michael, what they’re saying is, if you make a loan that they felt shouldn’t, if you make a loan that had credit qualities, less deserving than a typical prime borrower, they wanted to make sure that the lender was gonna be very prudent in making that credit decision. sure that the lender wasn’t prudent, they wanted to have teeth, and they’re built where they could go after these lenders, whereas before they could, things like that, Michael, things within that bill had certain factors like debt to income ratio, or ways to verify income. So Dodd Frank said, if you don’t verify income a certain way, or free debt ratio differently, or a few other factors didn’t adhere? Well, then it was considered non qm. Right? Those are the loans we started making back in 2013, before Dodd Frank came out. So we were doing non qm before non-QM was even a thing. So we were we were cool before we were cool, basically, right. And so we had a lot of performance, which allowed us to have a comfort to continue originating the non qm loans. Fast forward, the market has gotten comfortable with the evolution of these loans, the capital markets or the investors have gotten comfortable. And so the regulator’s felt Okay, now’s the time to loosen that credit standards a little bit. And so what they’ve done, Michaels, they’ve gone away from the underwriting criteria, and how to establish qm versus non qm or non qualified mortgage to more of just a what’s called an APR threshold or annualized percentage rate. So if the borrower’s percentage rate is higher than a certain threshold, that’s when they’ll call it a non qualified mortgage. And once again, when you go from a qualified mortgage to a non qualified mortgage, they provide a lot of legal teeth and legal ramifications to the borrower if something goes wrong. They’re correct.

Michael Chabot
And that’s because we had widespread what they called predatory lending back in the early 2000s, unfortunately, there was so much money to be made that people were taking advantage of borrowers. And I wanted to go back to I want to, so we’re not allowed to talk about interest rates and that kind of stuff. But the non qm product that Angel Oak is doing now, those rates are pretty good. They’re not what you would expect from a non qualified mortgage product, right from the old days, I should say.

Steven Schwalb
And that’s exactly right. That’s all a factor. Michael, have, as I’ve talked through this process. When we first started closing loans, we had no idea how the rating agencies would treat those loans. Sure. And so we ultimately put those into a securitization. We had no idea what the investors would perceive the value of those bonds. So we had to have a really high interest rate. Sure. But as as these loans have performed as we did our first securitization, and people were able to watch that, within the rating agencies give you a more and more secure or higher stamp of approval, the higher that they grade your bonds, the less that investors will take for return, because that means there’s less risk to them. And so we’ve seen all that happen, we’ve seen what we call that, that that coupon spread, or the grind in tighter, get lower and lower and lower than we saw the pandemic hit. And as we were talking earlier, with the pandemic proved is that these borrowers that we bank today, can have massive financial stress, and still perform. And so that got us over the edge to get the best credit rates we could possibly get. And once again, the better the credit rating, the lower the coupon that we can give the power to maintain the same returns that we need.

Michael Chabot
Yeah, and I think that’s the thing for me, as somebody who’s been an originator in this business for 18, going on 19 years is, you know, typically products that were outside the traditional box, they priced very high. And it was a last resort. And what I love about these products is that it’s not that case, and they can help so many people who’ve been pushed outside of being able to buy a home now they can come in and live the American dream like everybody else.

Steven Schwalb
Even to this day, Michael after being at this for the past 12 years here, Angel Oak trying to champion this mission for homeownership for these underserved borrowers, every now and then a new investor will come talk about talk to us about participate in buying some of our bonds. And they’ll they’ll they’ll let it slip of subprime a subprime borrower, I just, I always have to stop and correct them respectfully, of course, and say these are not subprime borrowers, I consider these ultra prime borrowers. Because if you take a look at the credit profile of these borrowers, they’re a stronger credit profile than these Fannie and Freddie loans. They just have something different. And so I like to refer to our borrowers, or subset of our borrowers, the bank statement borrowers, as ultra prime borrowers. Very high FICO scores there, though ltvs. Lots of money in the bank, and they’ve demonstrated their ability and willingness to pay bills and save money. Right. And that’s, that’s what you want to see.

Michael Chabot
Well, and I think it’s, I won’t drop names, but somebody from within our company within Angel Oak talks about, you know, Fannie, Freddie prime jumbo looks at your income from your W twos and or your tax returns. And really a tax return is used to show the income you reported and how much tax you owe or your refund, you’re getting back correct. And what you guys have done at Angel Oak has said, hey, look, we understand the self employed marketplace, we understand that you’re very successful, you’re making a lot of money, but you may not show all of that, as you know, income reported on your tax returns because of the way the tax laws are written. And so those people for the last However, many years have been really priced out of the market or unable to get a loan where now they can get a great loan and buy a home and, you know, step up or buy their first home, etc. And it’s really exciting to be able to help people with that.

Steven Schwalb
It’s great. And to your point, what in when you’re trying to verify income for a self employed borrower, what’s the best way to verify that they can make their monthly mortgage payments by looking at the tax returns and numbers on their tax returns? or looking at the actual positive cash flows that company has. So that’s what we do. We look at the positive cash flow and a trend, not just one month, but we look at the trend of 12 months or 24 months of the positive cash flow along with the reserves that they’ve been able to maintain during that cash flow. And so we only make sense that these are good bankable borrowers, and now $10 billion or $11 billion with originations later, Michael, we’ve been proven to be right here.

Michael Chabot
Now. Yeah, it’s exciting stuff. And we’re gonna do a lot of episodes in the future breaking down all the different products that Angel Oak offers. So really, what I want to go to now is we’ve talked about some great stuff, but how does this relate to anybody who’s listening that that’s either a consumer, you know, a realtor, maybe another loan officer, or you know, a home builder? How does how does everything we’re talking about relate to them?

Steven Schwalb
Yeah, we say this all the time, Michael, to set up the answer to your question. This product still hasn’t become mainstream. We think that it has the people in the halls of Angel Oak or people in the residential mortgage lending business or investors, they feel it has because that’s our industry, right? We talk with the industry, we have the jargon nine tune, we think it’s prevalent and it’s out there. But it’s really not you don’t see advertisements for self employed borrowers who don’t qualify and tax returns. And until that day happens, we’re not going to see this slice of the industry really, really grow to where it ultimately will So what I’ll say to self employed borrowers is, there is a home for your loan. If you have good credit, and you’re responsible with your spending, you can get a loan today, you don’t have to worry about what Fannie Freddie and a typical bank prime jumbo lender says, if you’ve got good cash flow and good credit, will bank that loan, there’s, there’s someone out there for you, for loan officers, and for real estate agents, I will tell you that there is a still a massive opportunity to for you to brand yourself to be the banker for these ultra prime borrowers. Ultra prime and ultra, ultra ultra high loan size borrowers, no one very few people have any hit anybody, Michael have built a business and branded themselves as someone who can do these loans. Yeah, they’re just getting these loans because a friend or roof firm, or they’ll have know someone who gets turned down, but they haven’t gone out to the marketplace to brand themselves. And so when you think about branding yourself in a prime jumbo size loan, right, and you get comfortable with these borrowers, these ultra prime borrowers, those are easy loans to originate and sell. And these borrowers, there’s not a lot of competition, you’re not gonna have, you know, five or six competitors, giving you price quotes, your, that bar is gonna love you, he’s gonna thank you for what he did for him. And he’ll give you referrals of other self employed borrowers. It’s just a massive opportunity for real estate agents and loan officers to get into make a name for themselves. And then for builders as well, whenever they have that self employed borrower coming to buy a house, if they can’t get qualified to traditional means there’s a home, there’s a very robust market for that loan. It’s just this robust market is in infancy stages of growing.

Michael Chabot
Yeah, andI heard a great story about a loan officer within Angel Oak that went out to a builder and said, Hey, give me anything that you can’t get through, you know, your because all builders have lenders that they partner with and do you know, all the qualifications, and they went out and said, Hey, just send me anything you get that you guys can’t do. And I don’t know if these are exact numbers. So please don’t hold me to it. But I heard they said, All right, well, here’s 10 loans we can’t do. And this loan officer was able to turn six of them around. And you know, that builder was like, yeah, we need to talk.

Steven Schwalb
You know, we’ve had loan officers or we have loan officers today, Michael, who are still hitting peak numbers from last year. Yep. And we seem to cash out refinances, right, and some refinances go away. Yeah. But these loan officers have made a name for themselves, in this self employed space, and through seeing their monthly volume, status same or continue to grow, because they’re building a brand for themselves in the marketplace. I think I think that within itself shows the power in originating these loans.

Michael Chabot
I agree. And to put a bow on this little segment, I would say that, you know, I’m a guy that’s been in the industry for 18 years. And at some point, you feel a little burnt out. And since joining Angel Oak, I feel rejuvenated, I feel like you know, young Spry kid again, because I’m excited that I have all these products to help people with. You know, come on, Michael, you You are a young Spry guy not trying to fool anybody. Oh, well. Thank you. And let’s real quick, I want to talk about some breaking news that came out. I think it was released yesterday, or maybe the day before, which is in relation to second homes and investment properties. Talk about real quick. There were some caps put in place at the beginning of the year. And what that meant. And now, I think was basically the Treasury and FHFA came out and remove those. Is that correct?

Steven Schwalb
That’s correct. So Michael, it’s the end of year, director, Calabria, who was rain FHFA, was a big proponent in shrinking the size of the GSE, GSE. And de risking the taxpayer. In other words, if we were to see a systemic issue with credit out in the marketplace, it wouldn’t be the taxpayer who to take the brunt like the taxpayer did back in 2007 2008. So his idea was to look at the loans that the agencies really initially were chartered to originate, that is second homes and non owner occupied. He wasn’t completely shutting down those loans. He was just trying to bring callers in limiting the amount of loans that those that amount of that product that a typical originator could do, which would in turn get Fannie and Freddie’s concentration in those loans down into a reasonable size. So he came out with that regulation. In addition, he said that medium sized originators could not deliver or anyone could not deliver more than 1.5 billion a year in origination to Fannie or Freddie. Wow. So what he’s trying there is making sure the bigger originators or these guys who want to become a bigger originator would be well capitalized and have the ability to move from what was called Fannie Freddie cash window where they sell the loan to moving to a more sophisticated model of issuing a Fannie, Freddie MBs or mortgage backed security.

Michael Chabot
Got it. So Let’s break that down real quick not to interrupt you, but so I’m a mortgage lender, meaning a company that say does $9 billion a year in originations? And I’m using just some made up numbers here. But let’s say out of that 9 billion, 7 billion is agency meaning Fannie, Freddie, that means under this, I could only sell 1.5 billion to them at the cash window, is that correct?

Steven Schwalb
That’s correct. And the rest would either have to go to an aggregator, got it? Or it would have to, they would have to issue their own Fannie and Freddie MBs, or mortgage backed security. Got it? Oh, got it. Okay. They weren’t cut off from Fannie and Freddie, they just had to deliver on their different, more sophisticated mechanism makes, that also takes more capital as well.

Michael Chabot
And basically, and please correct me if I’m wrong, because you are definitely the brains of this conversation here. So in for in layman’s terms for the consumer that led to higher interest rates, didn’t it?

Steven Schwalb
It did, Michael, when you talk about how what’s the one way that an originator can reduce the amount of non owner occupied second homes, they had to raise the interest rate to slow slower than the amount of loans they came in. In retrospect, however, this gave private capital or company by Mike Angel Oak and other investors the opportunity to buy a bunch of these loans because a lot of companies out there were above their 7% tolerance. From the time Calabria put the rule in place to today, right. And so a lot of these companies had to sell this, their second homes and unoccupied out into private capital, I, Angel Oak being one of them. And so what happened is private capital got a hold of all these billions and billions of loans. And they start issuing securitizations to see what the market would look like, and how they would treat these securitizations. And they went off fantastically. And so what that has done is provided people like Angel Oak and others, a true understanding of the value of these loans and the coupons on which Fannie and Freddie put these loans at for a week and now step in and compete with Fannie and Freddie. The issue and why FHFA came out and said, you know, what, we’re gonna have to suspend this for a while, is there is way too much friction in those loans, right. So when you’re a mortgage originator doing lots of loans, and you’re trying to find a place to sell these second homes are not occupied. And it was a very inefficient market, all the capital markets, private capitals, there is very inefficient market, they had to raise the rates. And in the last thing that the current administration wants to do is, is to cause friction in the housing market, when they’re trying to ensure housing for all Americans. And microfinance for non owner occupied loans. We can call that workforce housing. We didn’t want to see friction providing workforce housing, nor do you want in a other part of the housing, housing housing ecosystem. And so if you read what they came out with FHA, they came out with yesterday, Michael, they said, it’s a one year pause so they can analyze and evaluate exactly what it is they’re trying to accomplish. And how, and if and when, how they can re approach it and achieve this again, later on down the road.

Michael Chabot
Real quick, sorry to cut you off. So definition, so GSE is government sponsored entity or enterprise?

Steven Schwalb
Government sponsored enterprise, you’re correct.

Michael Chabot
And tell everybody listening? FHFA What does that stand for?

Steven Schwalb
Federal Home.

Michael Chabot
Yeah, I always I always blank on that one, too, because we all know it by by the acronym right?

Steven Schwalb
Yeah, I’m embarrassed.

Michael Chabot
No, please don’t be and so well, your home.

Steven Schwalb
Federal Home Finance Association?

Michael Chabot
Yes, no, no, it’s because we all go FHFA all the time. Just the last thing I wanted to clear up so. So for those listening, Fannie and Freddie were basically came about after the Great Depression. Is that correct? Sometime in that era?

Steven Schwalb
That’s true, Michael. They came to play in order to support us residential housing. Yes.

Michael Chabot
And then basically, like you had said, they came in as the life preserver and saved everybody, or as many people as they could, after the the, we call it the mortgage market meltdown, as I call it, excuse me, and basically, the government took them over. Correct?

Steven Schwalb
So as we talked about, when financial crisis hit, there was a lot of liquidity issues and Fannie and Freddie were having to pay out all this money and all these delinquent loans. And so they didn’t have that much capital in the Fannie Freddie coffers. And so the US Treasury had to come and say, Okay, we’re going to take you guys over, and we’re gonna give you all the liquidity and all the capital, all the cash you need to survive. This and to continue lending. And so that’s what’s happened. And so they went into conservatorship. And now it’s how each each administration says, Okay, do we want it in conservatorship or as a conservatorship? And if we want them out of conservatorship, how do we do that?

Michael Chabot
And that was the idea behind this right was to reduce the footprint to come out of conservatorship?

Steven Schwalb
When collaborating made the move, you’re exactly right to come out of conservatorship.

Michael Chabot
Alright, so let’s let’s, let’s move to what I want. I, I’m chomping at the bit to hear this answer to this question from you. And I know we’re getting to the end of our time. So I don’t want to hold you too long. But where do you see Angel Oak in the mortgage industry five years from now.

Steven Schwalb
We continue to grow Michael. And we continue to have massive aspirations and we continue to raise our investor base. Angel Oak, we can now officially say we’re all credit all things credit residential lending, I would see nothing more than our continued growth within the space. Anything residential credit that exists, I would expect us to be involved with it, providing that liquidity to the marketplace, the our branch system or retail loan officers, as well as supporting the market. I also anticipate us being right up there with the biggest of the biggest private capital in the US residential marketplace.

Michael Chabot
It’s exciting stuff. I really look forward to it. I’m glad I’m along for the ride with you guys. Talk about what do you think this would be the last question I asked you, which is what do you what do you expect looking forward for the mortgage industry in regard to the growth of non qm? And and how will Angel Oak continue to meet those needs in the marketplace?

Steven Schwalb
So let’s get the marketplace is going to evolve and it’s gonna evolve, it’s going to tell us where to go, Michael, you know, we talk about the gig economy. So if you look at the US marketplace, you see less and less of these millennials or even more aged borrowers in a typical w two job. So you’ll see these guys have part time jobs or self employed or what other avenue of revenue to make, you’re going to see as fall that provide financing for these guys. We’re the entrepreneurial guys we understand credit, we can see what the markets going through what the market needs. And so we can quickly put those guidelines together and follow the market, we can provide liquidity for these underserved borrowers, as we see, see the market. As further as we see self employed borrowers, we continue to understand and become and become further experts into the self employed borrower. So why not continually open up those guidelines as the loans perform? One thing we do good here and look, we’ll open up some guidelines will sit there, which he has known for a while. And once the credit proves itself, we go further. And we go further. We just don’t lick our fingers, stick it up in the wind up in the air to see which way the winds direct and going. We’re very data driven and data dependent people on the performance of our loans. And so we’ll continue following guidelines with the data from the performance of our loans. Also, let’s, let’s not forget these borrowers that come out of the pandemic, Michael, that may have credit dings as well. Well, they’re on the other side of it, just like the financial crisis, we had borrowers on the other side of that who were great bankable borrowers, they may not be four or five years out of bankruptcy or foreclosure. But due to the pandemic of their one year, and they back on the straight, narrow, will bank that borrower so it’s not only the self employed borrower will provide liquidity to Michael, it’s anybody out there?

Michael Chabot
Well, I mean, I’ll just quickly share a personal story, I helped a borrower with a with a bank statement loan through Angel Oak, where they’ve always done really well. And then they had a stretch of a few months during the pandemic where they had no business coming in. And now that everything’s opened up, their business is back on track. We did a 24 month bank statement loan, we looked at everything. And we said, yeah, this, this is a loan that makes sense. These are good people, they deserve to buy a home. So it’s great that we can do that. I love that you talked about you know, the gig economy because I think we’re where the market is headed is not just the labor market, but the mortgage market is most kids now today in college aren’t saying what they used to say, you know, 30 4020 years ago, hey, I want to go work for a big fortune 500 company, I want to work there for 2030 years and retire with you know, a pension, right? It’s just doesn’t work that way anymore.

Steven Schwalb
You got these guys, all these guys and girls. They’re entrepreneurs out there Mind blown and they’re very intelligent. They come through all these years of schooling and they’re so far advanced and I was with my education me to some of these guys not even finishing college. And they’re able to create via technology niches in the world for them and to create a great living. And these guys don’t want to go to an office every day. They don’t want to work that nine to five Michael, they want the freedom, but they’re able to do it and make good money and why not believe in those guys and bank Guys, so as we talk about the millennials and people’s now starting to get in the housing market, these people need help. And they’re smart people. They’re good people and their credit qualifying people. And let’s see what happens there.

Michael Chabot
Yeah. Well, I, I’m excited to be a part of this ride. I’m honored to be hosting this podcast. And, Steven, I want to thank you for your time today. I know your time is precious. And we went a little over and I apologize. But I mean, I could talk to you for hours. You’re just a wealth of knowledge. And thank you for doing what you’re doing.

Steven Schwalb
Yeah, Michael, I cannot tell you again, how much I appreciate you joining our program. It was a great experience for me. And I just probably had one of the most embarrassing moments on this podcast ever I had. Its Federal Housing Finance Authority, I’m sorry, agency agency agency. So I’m so embarrassed. I use that term all the time. I knew what it meant. I just couldn’t-

Michael Chabot
It’s because I put you on the spot.

Steven Schwalb
Hey, that’s what happens. That’s what happens.

Michael Chabot
And I hope you had fun. And, you know, to our listeners, I just want to say thank you for listening to Your Mortgage Matters Podcast brought to you by Angel Oak Home Loans. Where achieving your unique personal or business goals for financial success matter to us. This is all about you. We’re doing this because we want to educate, we want to pull back the curtain. We really want you to understand what’s happening in the market, and how you can either buy a home, refinance a home, buy more homes, or help people by doing more loans. It’s all about you. If you enjoyed this, like it, share it, and we’ll be back to you soon with our next episode. And again, Steven, thank you so much for joining the show.

Steven Schwalb
Thank you, Michael.

Michael Chabot
All right.