Angel Oak Capital Advisers sponsored a fund to securitize “Fix and Flip” loans. These loans were targeted at borrowers for the purpose of purchasing, renovating, and selling residential properties. It looks like Angel Oak didn’t get the underwriting correct. Angel Oak saw an unexpected increase in late mortgage payments delinquencies. The securitization had a covenant that required early amortization payments to investors in the securitization if there was a greater than 15% delinquency for two consecutive months.
The “Fix and Flip” loans had escrow accounts to pay draws to borrowers after completion of renovations the properties. The securitization documents said these escrow accounts would be used for renovations and repairs. The documents did not specifically allow the use of the escrow to reduce delinquencies.
Angel Oak divert escrowed renovation funds to bring delinquent mortgage loans into current status and reduce delinquencies. According to the SEC complaint this was not consistent with disclosures made to investors in the certification. Angel Oak contacted delinquent borrowers and instructed them to make requests for escrow funds to reimburse for renovations, with the understanding that the funds would instead be used to pay off delinquent balances. There were email documenting the process with borrowers.
There are emails documenting the decision to seek the diversion of funds.
“We have to keep the 3 month average of 60+ dq [delinquencies] under 15% to avoid an early amortization trigger to trip. This trigger tripping would be extremely negative for our prospects of doing further securitizations and will also negatively impact our broader AOMT shelf.”
The additional problem you can see from that quote is that the early amortization would hurt effort to pull in investors for the next securitization. It’s not just a question of defrauding the current investors, but using the fraud to raise more capital.
As an additional conflict, Angel Oak held a junior position in the securitization. The early amortization trigger would have a substantial, negative impact on that junior position.
Blame was also placed on Ashish Negandhi, a loan portfolio manager responsible for purchasing loans to be securitized by Angel Oak as well as monitoring the securitizations’ performance after their sale to investors.
As a result of the SEC action, Angel Oak agreed to pay a $1.75 million penalty and Mr. Negandhi agreed to a $75,000 penalty.
Sources:
- SEC Charges Angel Oak Capital Advisors with Misleading Investors in $90 Million Fix-and-Flip Securitization: https://www.sec.gov/news/press-release/2022-140
- SEC Order: https://www.sec.gov/litigation/admin/2022/33-11090.pdf
- Atlanta-based Angel Oak pays $1.75 million SEC fine: https://www.ajc.com/news/atlanta-based-angel-oak-pays-175-million-sec-fine/OP7KSMGGHJG6JCWQHZJCZ5TMH4/