@Angel Oak Capital.
• US life insurance companies have more than doubled their residential mortgage loan (RML) holdings over the past four years, now making up 2% of life insurers' total aggregate investment portfolios.
• The demand for RMLs has been driven by the significant growth in annuity sales, the 68 basis points (bps) NAIC risk-based capital charge (RBC) they receive, comparable to a single-A-rated bond, and the attractive yield per unit of RBC. Insurance companies can also obtain Federal Home Loan Bank financing to further enhance potential returns.
• Given the attractive return profile and credit characteristics, Non-QM has been particularly attractive for insurers. Compared to Agency mortgage origination volumes, which drastically dropped as rates increased in 2022, Non-QM origination volumes have remained robust.
• Key drivers of performance are default losses and prepayments on the Non-QM mortgages. Credit losses on Non-QM loans have been minimal, with only a 0.02% cumulative loss across the $150 billion of loans securitised since 2018.
• The spread between Non-QM rates and Agency mortgage rates is one of the key factors in determining expected prepayment rates, and recent mortgages are being originated at historically tight spreads to Agencies (~100 bps). We believe a scenario of slower-than-expected prepayment speeds on current Non-QM origination is likely if the spread to Agencies remains tight.
