DBRS Morningstar Finalizes Provisional Ratings on Angel Oak Mortgage Trust 2019-5

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following Mortgage-Backed Certificates, Series 2019-5 (the Certificates) issued by Angel Oak Mortgage Trust 2019-5 (AOMT 2019-5 or the Trust):

-- $218.4 million Class A-1 at AAA (sf)
-- $22.6 million Class A-2 at AA (sf)
-- $48.9 million Class A-3 at A (sf)
-- $27.3 million Class M-1 at BBB (sf)
-- $14.1 million Class B-1 at BB (sf)
-- $13.4 million Class B-2 at B (sf)

The AAA (sf) rating on the Class A-1 Certificates reflects 38.10% of credit enhancement provided by subordinated Certificates in the pool. The AA (sf), A (sf), BBB (sf), BB (sf) and B (sf) ratings reflect 31.70%, 17.85%, 10.10%, 6.10% and 2.30% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

This transaction is a securitization of a portfolio of primarily first-lien fixed- and adjustable-rate non-prime and prime residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 969 loans with a total principal balance of $352,770,946 as of the Cut-Off Date (October 1, 2019).

Angel Oak Home Loans LLC, Angel Oak Mortgage Solutions LLC (AOMS) and Angel Oak Prime Bridge, LLC (collectively, Angel Oak) originated 100.0% of the portfolio (969 loans). The Angel Oak first-lien mortgages were mainly originated under the following eight programs:

(1) Platinum (41.5%) – Made to borrowers that have prime or near-prime credit scores, but who are unable to obtain financing through conventional or governmental channels because (a) they fail to satisfy credit requirements, (b) they are self-employed and need alternative income calculations using 12 or 24 months of bank statements or the most recent year income tax return or (c) they may have been subject to a bankruptcy or foreclosure 48 or more months prior to origination.

(2) Portfolio Select (38.7%) – Made to borrowers with near-prime credit scores who are unable to obtain financing through conventional or governmental channels because (a) they fail to satisfy credit requirements, (b) they are self-employed and need an alternate income calculation using 12 months or 24 months of bank statements to qualify, (c) they may have a credit score that is lower than that required by government-sponsored entity underwriting guidelines or (d) they may have been subject to a bankruptcy or foreclosure 24 or more months prior to origination.

(3) Investor Cash Flow (10.9%) – Made to real estate investors who are experienced in purchasing, renting and managing investment properties with an established five-year credit history and at least 24 months of clean housing payment history, but who are unable to obtain financing through conventional or governmental channels because they (a) fail to satisfy the requirements of such programs or (b) may be over the maximum number of properties allowed. Loans originated under the Investor Cash Flow program are considered business-purpose and are not covered by the Ability-to-Repay (ATR) or TILA/RESPA Integrated Disclosure rules.

(4) Non-Prime General (7.1%) – Made to borrowers who have not sustained a housing event in the past 24 months, but whose credit reports show multiple 30+-day and/or 60+-day and/or 90+-day delinquencies on any reported debt in the past 12 months.

(5) Non-Prime Recent Housing (1.1%) – Made to borrowers who have completed or have had their properties subject to a short sale, deed in lieu, notice of default or foreclosure. Borrowers who have filed bankruptcy 12 or more months prior to origination or have experienced severe delinquencies may also be considered for this program.

(6) Non-Prime Foreign National (0.3%) – Made to investment property borrowers who are citizens of foreign countries and who do not reside or work in the United States. Borrowers may use alternative income and credit documentation. Income is typically documented by the employer or accountant and credit is verified by letters from overseas credit holders.

(7) Asset Qualifier (0.3%) – Made to borrowers with prime credit and significant assets who can purchase the property with their assets, but choose to use a financing instrument for cash flow purposes. Assets should cover the purchase of the home plus 60 months of debt service and four months of reserves. No income documentation is obtained, but the borrower is qualified based on certain credit requirements (minimum score 700) and significant asset requirements, calculated as 60 times of all monthly debts and new principal, interest, taxes, insurance and association payments (minimum of $1,300 monthly disposable income). These loans are available within both the Platinum and Portfolio Select programs.

(8) Non-Prime Investment Property (0.2%) – Made to real estate investors who may have financed up to four mortgaged properties with the originators (or 20 mortgaged properties with all lenders).

In addition, the pool contains 0.2% second-lien mortgage loans, which were originated under the guidelines established by the Federal National Mortgage Association and overlaid by Angel Oak.

Select Portfolio Servicing, Inc. is the Servicer for all loans. AOMS will act as Servicing Administrator and Wells Fargo Bank, N.A. (rated AA with a Stable trend by DBRS Morningstar) will act as the Master Servicer. U.S. Bank National Association (rated AA (high) with a Stable trend by DBRS Morningstar) will serve as Trustee and Custodian.

Although the mortgage loans were originated to satisfy the Consumer Financial Protection Bureau (CFPB) ATR rules, they were made to borrowers who generally do not qualify for agency, government or private-label non-agency prime products for various reasons described above. In accordance with the CFPB Qualified Mortgage (QM) rules, 0.3% of the loans are designated as QM Rebuttable Presumption and 84.5% as non-QM. Approximately 15.3% of the loans are made to investors for business purposes and, thus, are not subject to the QM rules.

The Servicer will generally fund advances of delinquent principal and interest on any mortgage until such loan becomes 180 days delinquent. The Servicer is obligated to make advances in respect of taxes, insurance premiums and reasonable costs incurred in the course of servicing and disposing of properties.

On or after the two-year anniversary of the Closing Date, the Depositor has the option to purchase all outstanding certificates at a price equal to the outstanding class balance plus accrued and unpaid interest, including any cap carryover amounts. After such purchase, the Depositor then has the option to complete a qualified liquidation, which requires a complete liquidation of assets within the trust and proceeds to be distributed to the appropriate holders of regular or residual interests.

The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior tranches. Principal proceeds can be used to cover interest shortfalls on the Certificates as the outstanding senior Certificates are paid in full. Furthermore, excess spread can be used to cover realized losses first before being allocated to unpaid cap carryover amounts up to Class B-2.

The ratings reflect transactional strengths that include the following:

-- Improved underwriting standards,
-- Robust loan attributes and pool composition,
-- Satisfactory third-party due diligence review,
-- Strong Servicer and
-- Current loans and faster prepayments.

The transaction also includes the following challenges:

-- Representations and warranties framework and provider,
-- Non-prime, QM-Rebuttable Presumption or Non-QM loans,
-- Geographic concentration and
-- Servicer advances of delinquent principal and interest.

The full description of the strengths, challenges and mitigating factors is detailed in the related report.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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