Company and portfolio manager hit with heavy fine by SEC
The Securities and Exchange Commission (SEC) this week charged Angel Oak Capital Advisors and one of its senior portfolio managers for misleading investors about the firm’s delinquency rates, it has emerged.
The SEC issued cease-and-desist proceedings against the two on Wednesday (August 10) adding that the company improperly diverted funds to reduce mortgage delinquency rates.
According to the Commission, the matter involves the inaccurate disclosure of mortgage delinquency rates by Atlanta-based Angel Oak in connection with the securitization of residential loans.
The incident dates back to 2018, when Angel Oak raised $90 million from investors through the first-ever securitization of a pool of ‘fix and flip’, short-term, high-interest loans.
Shortly after the closing of the offering in March of that year, the company noted “an unexpected increase” in the rate of delinquencies in the underlying pool of the loans, it was outlined.
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The rising delinquency rate threatened to breach an early, 60-day amortization trigger in the securitization designed to protect noteholders against losses, which would have required an early repayment of the investment, it was stated.
Angel Oak became “increasingly concerned” about the possible damage resulting from an early amortization, and in response tried to reduce mortgage delinquency rates by diverting the loan funds held in escrow accounts to make payments on borrowers’ delinquent mortgages, it was stated.
The use of funds held in LIP (loan in progress) accounts in this manner contravened the rules as they were intended for reimbursing expenses related to renovating the mortgaged properties, according to the Commission.
The result was that Angel Oak was able to reduce delinquency rates in the underlying loan pool artificially, it stated, thereby preventing the triggering of an early amortization. It also meant that the company avoided having to make an early repayment of the investment to senior tranche noteholders later that year, in November 2018.
Angel Oak not only failed to disclose to noteholders that it had used funds held in escrow in LIP accounts to mitigate loan delinquencies, which continued through to 2019, but it also issued “materially false and misleading information” in a report on the delinquency rates, the Commission outlined.
The Commission found that Ashish Negandhi, a 52-year-old senior portfolio manager at the company, was aware of the situation and that, concerned about the adverse financial and reputational harm it would have on Angel Oak, approved the use of LIP account funds to mitigate the impact of the loan delinquencies.
By his actions, Negandhi failed to disclose the real situation to noteholders, it was stated. Additionally, both he and Angel Oak failed to inform the board of directors of a private fund for which Angel Oak served as investment adviser of its improper use of LIP funds.
According to Angel Oak’s website, Negandhi “focuses on building and managing structured investment strategies within the asset-backed securities market”.
He previously managed a portfolio of up to $2 billion in assets at the Washington Mutual Bank, having guided investments based on risk analysis and exposure valuations, including monitoring credit default and interest rate risk.
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The Commission also cited an email sent by an unnamed portfolio manager, warning about the need to keep delinquencies under 15% to avoid triggering an early amortization.
It said: “This trigger tripping would be extremely negative for our prospects of doing further securitizations and will also negatively impact our broader AOMT shelf.
“We would need to be under 13% at end of Sept. to avoid the three-month average trigger.”
It also emerged that the board of the Angel Oak-managed private fund discussed how an early amortization caused by breaching the 60-day delinquency trigger would impact on its affiliated businesses.
It said: “While the fix and flip loans are a different transaction than that of our other eight non-QM securitizations, it does share the same overall program name, Angel Oak Mortgage Trust, as well as having collateral from an affiliate originator. As a result, it could create a negative impact on the overall program.”
Angel Oak also approached delinquent borrowers, instructing them to make requests for mortgage loan funds to cover property improvements, with the understanding that the funds would instead be used to pay off delinquent balances, it was stated.
As a result of their actions, Angel Oak and Negandhi have agreed to settle charges and pay the Securities and Exchange Commission a penalty of $1.75 million and $75,000, respectively.
MPA has contacted Angel Oak for comment.
