A pool of loans aggregated by Ares Alternative Credit Management managed funds will secure about $330 million in mortgage-backed certificates from the HOMES 2023-NQM2 Trust.
Home prices that had escalated through the pandemic have seen signs of moderating, and had even declined in Q3 2022, according to observations from Fitch Ratings, which expects to assign ratings to the notes. As of February 2023, home prices rose 2.0%, according to the rating agency.
Some 764 loans, which have prime characteristics, are in the collateral pool. Borrowers have a moderate credit profile, with Fitch model FICO scores of 726, a moderate sustainable loan-to-value ratio of 76.3%, and an original combined LTV of 72%.
The non-qualified mortgage pool consists mostly of loans underwritten to less than full documentation, some 96%. Also 47% of the loans were underwritten to a bank statement program for verifying income. These underwriting methods create a potential credit negative in the portfolio, according to Fitch. In another potential challenge, the pool consists of 364 debt service coverage ratio products. Those are business-purpose loans are available to real estate investors who are qualified on a cash flow basis, instead of debt-to-income ratio. Further, borrower income and employment are not verified.
Fitch expects a loss of 32.6% on the 'AAA' notes, which is driving the higher pool expected losses due to a weighted average (WA) concentration of 33.2%.
HOMES features several positive characteristics that Fitch considers to be positive, including excess cash flow. The underlying loans also benefited from a third-party due diligence review, and came out of that review graded 'A' or 'B' according to Fitch. Further, HomeXpress originated a majority of loans in the pool, 79%, and the rest were originated to Angel Oak's underwriting guidelines by multiple underlying correspondent originators, the rating agency said.
On average, the loans have a balance of $432,048, with seasoning of 9.7 months of seasoning. Most borrowers, 55.6%, took out the loans to finance a primary residence, while 41.2% of loans bought an investor property, Fitch said.
Fitch expects to assign ratings of 'AAA' to the $220 million in class A1 notes; 'AA' to the class A2 notes; 'A' to the A3 notes' 'BBB-' to the M1 notes; 'BB-' to the B1 notes and 'B-' to the B2 notes. All classes of notes have a legal final maturity of February 2068.
