Rob McDonough, director of ESG and regulatory initiatives at Angel Oak Capital, Advisors discusses its issuance of the US's first-to-market non-agency social bond securitisation

1./Can you provide more detail on the framework you developed to quantify the deal’s social impact at the loan level?

The core strategy underpinning the formation of Angel Oak’s Non-QM mortgage lending operations in 2011 was to address the material social inequities caused by the tightening of mortgage underwriting standards under the Dodd-Frank Act and other legislation in the aftermath of the financial crisis.  Many potential borrowers with non-standard sources of income, primarily self-employed individuals, were effectively denied access to mortgage credit under U.S. government agency loan guarantee programs. 

Angel Oak uses the securitisation markets to provide longer term financing for their non-QM mortgage lending programs, and one of the critical success factors of our Angel Oak Mortgage Trust securitisation platform has been the strong performance of the loans originated under our non-QM lending programs.

Angel Oak Capital Advisors, LLC became a signatory to the UN’s Principles for Responsible Investing in 2017 and formally adopted these principles to integrate ESG across the firm’s operations.  As one component of our ESG integration program, Angel Oak had been closely following the market to identify an appropriate framework that aligned with our core strategy of providing positive social impact by increasing access to housing for underserved borrowers. 

Angel Oak observed the securitisation markets began to coalesce around the International Capital Market Association (ICMA) Social Bond Principles in late 2020 when both Fannie Mae and Freddie Mac began successfully issuing residential and commercial mortgage-backed securities under their internally-developed social/sustainable bond frameworks.  Kensington Mortgage, a private UK-based mortgage lender, also implemented a social bond framework under the ICMA standards in February 2021 and subsequently issued a RMBS under this framework in March 2021.  The Yorkshire Building Society, another UK mortgage lender, did the same in March 2021.

2./How important was securing a second-party opinion to the deal’s success? What did this involve?

ISS ESG provided a Second Party Opinion (SPO) on Angel Oak’s social bond framework dated April 2021.  Angel Oak reached out to a number of social bond SPO providers through an RFP process and selected ISS based on their previous experience providing this service for the Kensington UK residential mortgage Social Bond securitisation in March 2021, which at the time was the only non-government guaranteed Social Bond RMBS to have been successfully issued.

3./Has the proportion of underserved homebuyers in the US grown due to the Covid-19 fallout?

The underserved borrowers that are targeted by our social bond framework, primarily self-employed small business owners and sole proprietors, did not inherently increase in number during the pandemic.  However, their financial position became substantially more precarious as a result of local and federal government requirements to implement lock-downs.  These policies had a disproportionate impact on small businesses that did not have access to capital to operate under lock-down scenarios where restaurants, retailers, and storefronts were required to shutter their operations for weeks and sometimes months at a time.  Angel Oak’s ability to provide residential mortgage credit to these borrowers provided much needed relief to these individuals during a time when small business owners needed to utilize any available working capital to sustain their businesses under these challenging conditions.

4./Angel Oak oversaw the entire process from origination to securitisation thanks to the vertical integration of its lending and capital entities. What did this involve?

Angel Oak Capital Advisors, LLC (AOCA), an SEC registered investment advisor, manages the overall securitisation process for bonds issued from the Angel Oak Mortgage Trust (AOMT) platform.  Non-QM mortgages originated by Angel Oak Mortgage Solutions and Angel Oak home loans, both affiliates of AOCA, are initially funded by warehouse lines of credit but are eventually purchased by private fund structures managed by AOCA.  Once a sufficient amount of loans have been aggregated, each loan is subjected to a third party diligence review for adherence to specific credit, compliance and valuation standards. 

5./What were the drivers behind creating this model?

Angel Oak was one of the very first mortgage lenders to develop lending programs conforming to the new non-QM underwriting requirements in 2011.  In addition, we were one of the first issuers of non-agency RMBS in the post-financial crisis period.

6./Did the social label enable you to broaden your investor base?

The investors in the AOMT 2021-2 had generally participated in previous securitisations issued by Angel Oak or were broadly familiar with the non-QM space and had looked at previous transactions.  Conversations with our syndicate bankers did indicate broader interest from other investors that had not participated in previous securitisations, but it is not clear if this interest was due specifically to the social bond aspect of this transaction.

7./Are you expecting to issue further social/ESG deals in the near future?

While Angel Oak may issue future securitisations that do not completely conform to our Social Bond Framework, the intention behind developing and implementing our framework is to support the consistent issuance of securitisations that are formally designated as social bonds going forward.

8./Do you anticipate other RMBS issuers to follow with similar transactions?

The substantial demand from investors for social, sustainable and green bonds is likely to increase the probability of other issuers developing their own frameworks. 

9./What are the current challenges and opportunities involved in bringing social/ESG securitisations in the US?

The challenge is to identify appropriate target populations and develop lending programs that can generate a positive social impact for those populations.  Angel Oak is restricted by federal and state level regulations from providing favorable credit terms to any class of borrowers, because even if one underserved class received a benefit, this would nevertheless be in violation of Fair Lending/Fair Credit laws which require that we provide equal access to credit.

Angel Oak’s non-QM lending model was calibrated to specifically address potential borrowers who have been excluded from the Agency lending process.  These underserved borrowers are most frequently self-employed sole proprietors or small business owners with non-standard source of income that cannot be easily evaluated by the automated underwriting programs used by agency lenders.

Other non-QM lenders might develop and implement social bond frameworks under which they could issue social bonds.

Angela Sharda