Impac, Angel Oak focus on non-QM with mixed results

Two players in the market for loans to outside-the-box borrowers generated mixed results for the second quarter, when product margins grew increasingly attractive compared to mainstream mortgages.

Non-qualified mortgage specialist Angel Oak Mortgage, which went public in June, recorded quarter-to-date net income of $2.2 million and acquired $395.5 million in new loans. Impac Mortgage Holdings, which originates a mix of non-QM and government-sponsored enterprise loans, recorded a $8.9 million second-quarter net loss that improved on the -$23 million recorded a year ago. However, it was greater than losses from the first quarter of this year ($683,000) due to valuation changes and expenses involved in rebuilding its non-QM operation. Non-QM lending at the company jumped to nearly $101 million from just under $15 million in the previous fiscal period.

Investment in non-QM during the second quarter of this year presents a marked contrast to conditions during the same time period in 2020. The non-QM market had briefly collapsed due to pandemic-related market disruption at that time and some players fled it in favor of the government-sponsored enterprise loans. A year later, second-quarter earnings show that when it comes to margins, it’s now non-QM that looks more favorable.

“The...GSE origination business was not immune from the pressure of compressed margins experienced by the industry in the second quarter,” Impac Chairman and CEO George Mangiaracina noted in a press release, adding that, in contrast, the company is seeing “healthy margins” in non-QM.

While pressure to diversify into higher-margin loans has been known to loosen mortgage underwriting to worrisome degrees in the past, both companies said in separate earnings calls that the leeway they’ve provided in qualifying nontraditional borrowers has not been excessive.

“We took an iterative and risk-based approach to updating our credit box guidelines during the second quarter to provide a competitive offering to the market while maintaining...high quality credit standards,” said Justin Moisio, chief administrative officer, Impac.

“Let me emphasize that our borrowers are not inferior credit,” Angel Oak CEO Robert Williams said. “In fact, the credit metrics are solid, including prime to near prime credit scores, mid-70% loan-to-value and low debt-to-income ratios.”

Although non-QM loans did grow quickly during the quarter at Impac, they still represented a relatively small share of its roughly $600 million in originations, so the niche may need some time to grow large enough to enjoy efficiencies of scale.

Overall originations were down from $850 million during the previous fiscal period. Company expenses in the second quarter totaled $19.6 million, up compared to almost $14.5 million a year ago but down from nearly $21.3 million in the first quarter.