Angel Oak Solves Fix-and-Flip Problem
The latest securitization of “fix-and-flip loans” employed a novel structure that industry professionals see as a possible road map for other issuers.
On March 2, Angel Oak Capital privately placed $90 million of bonds backed by short-term loans to developers and speculators who buy run-down houses, and then quickly fix and resell them. Performance Trust handled distribution and structuring duties — using a revolving trust for the first time in the asset class.
While estimates of fix-and-flip financing volume range from $20 billion to $40 billion annually, lenders in the sector typically have favored whole-loan sales over securitization. That’s in part because the loans typically mature in 6-12 months, which can be too short to support bonds with average lives long enough to appeal to most investors. Indeed, the few securitizations that have priced to date have carried maturities of only about a year.
Enter Performance Trust’s use of a revolving structure for Angel Oak’s transaction. With the issuing trust set up to acquire new loans as the original ones are paid off, Angel Oak was able to offer the deal’s $63 million senior tranche with a maturity of 1.9 years.
The issuer retained a $27 million subordinate piece.
After the deal priced, a number of fix-and-flip lenders contacted Performance Trust about the possibility of incorporating securitization into their funding strategies. “You don’t see these deals often, and the few that get done tend to pay off within a year,” one source said. “[Performance Trust’s] structure is getting people’s attention.”
Another selling point: Angel Oak employed a deal monitor, AMC Diligence. And it doesn’t hurt that the bonds throw off generous yields, with the senior tranche of Angel Oak’s transaction carrying a 4% coupon.
Angel Oak, an Atlanta consumer-finance company with $8.5 billion of assets, originates fix-and-flip loans via its Angel Oak Prime Bridge unit. The interest rates borrowers pay start at 9.25%.
Angel Oak expects to finance up to $150 million of loans via the revolving trust. Unlike the master trusts used in credit-card securitizations, which issue bonds continuously, the vehicle designed by Performance Trust will unwind once bondholders receive their final payments. However, Angel Oak plans to continue working with Performance Trust to fund future fix-and-flip loans.
A mortgage professional who attended the Structured Finance Industry Group’s “SFIG Vegas” conference in Las Vegas on Feb. 25-28 said there was lots of chatter about the potential for fix-and-flip bonds to emerge as an active asset class. But for now, lenders remain focused on whole-loan sales, rather than securitization. “If people get comfortable with the structure Angel Oak used, then maybe [securitization] will take off,” he said.
Performance Trust, a Chicago firm that offers investment-banking services to small banks and other lenders, launched a structured-product underwriting business in 2016. The Greenwich, Conn., unit, led by Mike Kelly, so far has worked on smaller, mostly unrated offerings backed by personal loans, small-business loans, home-equity loans and mortgages. Working with Kelly is Ara Balabanian, who arrived in 2016. He previously structured asset- and mortgage-backed bond deals at Goldman Sachs and RBS.
To handle distribution, Performance Trust has a large sales team with access to a national network of community banks. Such a network makes it easier to place unrated bonds, a source said.
Angel Oak is best known as an originator of non-agency mortgages. The firm was founded in 2008 by former Washington Mutual executives Brad Friedlander and Sreeni Prabhu, along with Michael Fierman, who previously ran mortgage shop SouthStar Funding.