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Redwood Trust Inc.<\/strong>, a real estate investment trust (REIT) based in Mill Valley California that has residential operations focused on nonagency jumbo loans, recently reported a second-quarter 2022 net loss of $100 million, after recording a net gain of $31 million in the prior quarter.<\/p>\n Likewise, Atlanta-based\u00a0A<\/a><\/strong>ngel Oak Mortgage Inc.<\/strong><\/a>, a real estate investment trust focused on nonqualified mortgages, or non-QM, recently announced that it was struggling with red ink \u2014 recording a net loss of $52.1 million for the second quarter ended June 30, bringing its total losses for the year so far to $95.7 million.<\/p>\n The common theme in the earnings results for both REITs is the impact of fast rising interest rates and general rate volatility on their residential mortgage holdings and operations. In general, lower-rate mortgages are at a competitive disadvantage in terms of pricing in securitization and loan-trading liquidity channels in such an environment because they are worth less than the newer crop of higher-rate mortgages. Keith Lind, CEO of non-QM lender Acra Lending, put it this way: \u201cThese aren\u2019t bad loans, just bad prices.\u201d<\/p>\n \u201cWe continued to experience a challenging economic environment in the second quarter of 2022,\u201d said Robert Williams, president and CEO of Angel Oak Mortgage (AOMR). \u201cHistoric inflationary pressures resulted in continued volatility, both in nominal interest rates and in the widening of interest rate spreads, driving unrealized losses on our portfolio of target assets.\u201d<\/p>\n Because they are deemed riskier loans than conforming agency-eligible mortgages, rates for non-QM loans generally average around 150 basis points higher than conforming rates in a normal market, according to industry experts.<\/p>\n AOMR is a publicly traded REIT that is part of Angel Oak Cos.,<\/strong> a long-term player in the non-QM mortgage market. It is externally managed and advised by an affiliate of Angel Oak Capital Advisors<\/strong>. The Angel Oak Cos. family of affiliates also includes non-QM lenders Angel Oak Home Loans<\/strong> and Angel Oak Mortgage Solutions<\/strong>.<\/p>\n AOMR has bulked up its warehouse lending arsenal to help bolster liquidity to better cope with the volatility of the current market. Its earnings report shows that it added a new $340 million warehouse financing facility during the second quarter and since the end of the quarter it increased the capacity of an existing warehouse line by $260 million \u2014 to a total of $600 million. The added warehouse financing capacity brings \u201cthe maximum availability on all financing lines to $1.9 billion,\u201d the REIT reports.<\/p>\n Rapidly rising interest rates also negatively impacted the bottom line for Redwood Trust. Since the beginning of the year, rates are up more than 2 percentage points \u2014 with the most recent\u00a0P<\/a>rimary Mortgage Market Survey<\/a>\u00a0from\u00a0Freddie Mac<\/strong> showing the conforming 30-year fixed-rate mortgage with an average rate of 5.22%.\u00a0<\/p>\n Redwood reported\u00a0i<\/a>n a review<\/a>\u00a0of its second-quarter earnings performance that \u201cprofitability in the quarter was impacted by deterioration in the prices of jumbo loans\u2026.\u201d<\/p>\n “Our financial results reflect the historic volatility and spread widening that characterized markets during the second quarter,\u201d said Christopher Abate, CEO of Redwood. \u201cThe magnitude of rapidly rising rates impacted our residential mortgage banking business, while demand for shorter-term financing from our business-purpose lending borrowers [including bridge loans and single-family rental property loans] proved more resilient.\u201d<\/p>\n Redwood, too, is ensuring it has adequate liquidity to ride out the rough patch in the market. Redwood reported in the earnings-review report that in addition to $412 million in cash and financeable loans as of June 30, \u201cwe also have over $450 million of other unencumbered assets and approximately $2.7 billion of unused warehouse capacity to support go-forward mortgage banking production.\u201d<\/p>\n The REIT, however, warns that there are still plenty of low-rate jumbo mortgages for the nation\u2019s housing market to digest. Redwood\u2019s earnings-review report states that the majority of jumbo inventory \u201cyet to be sold or securitized in the current market is at lower coupons [3.5% or less],\u201d which will \u201cimpact executions for those seeking to securitize.\u201d<\/p>\n \u201cWe believe this overhang will clear in the coming quarters,\u201d Redwood\u2019s earnings-review report states, adding that the REIT\u2019s inventory of jumbos now has an average coupon greater than 5%.<\/p>\n \u201cRedwood has sold substantially all of its lower-coupon jumbo mortgages, which should benefit our margin performance going forward,\u201d the REIT earnings-review report states.<\/p>\n For another REIT focused on the non-QM market, Pasadena, California-based Western Asset Mortgage Capital Corp.<\/strong>(NYSE: WMC), the story is similar, though arguably more dire. <\/p>\n Western Asset, which is managed by investment advisor Western Asset Management Co. LLC<\/strong>, recently announced that it is exploring a potential company sale or merger in the wake of posting a $22.4 million net loss for the second quarter ended June 30 \u2014 on the heels of posting a $22.2 million loss in the first quarter. The REIT, with some $2.8 billion in assets, has a diverse portfolio of residential and commercial real estate assets.<\/p>\n A closer look at Western Asset\u2019s books shows that as of June 30 its residential whole loan portfolio, nearly all of which is comprised of non-QM loans, was underwater by some $44 million. That\u2019s based on a comparison of the principal balance of the loans on the books and an assessment of their fair market value as reported by the REIT as of that date.<\/p>\n The fallout in the non-QM market, due in large measure to the volatility of rates this year, is not limited to REITs. Non-QM lender First Guaranty Mortgage Corp.<\/strong> filed for Chapter 11 bankruptcy protection<\/a> at the end of June \u2014 leaving four warehouse lenders on the hook for more than $415 million. Then, in early July, another non-QM lender, Sprout Mortgage, shuttered its doors suddenly, leaving employees out in the cold.<\/p>\n Just weeks later, a text message leaked to the media revealed that Flagstar Bank<\/strong> is ramping up scrutiny<\/a> of non-QM lenders prior to advancing warehouse funding. Flagstar will now require advance approval for funding advances.<\/p>\n The bank also indicated it may adjust \u201chaircuts\u201d \u2014 the percentage of the loan the originator must fund itself to ensure it has skin in the game. The leaked message included a list of 16 non-QM lenders that would be affected by the changes.<\/p>\n \u201cWe need to see rates kind of stabilize, flatten for a minute, just to kind of be able to work out the problems,\u201d said John Toohig, head of whole loan trading at Raymond James<\/strong> in Memphis. He added that the hope is that at some point next year, once the Federal Reserve has eased up on its monetary tightening policy, rates might even dip some.<\/p>\n \u201cThat\u2019s the hope, that rates will fall again, and we\u2019ll start this baby back up,\u201d Toohig said.<\/p>\n The post Redwood Trust, Angel Oak Mortgage awash in red ink in Q2<\/a> appeared first on HousingWire<\/a>.<\/p>\n