KBRA's ratings could shake the foundations of Angel Oak Mortgage Trust 2024-13

In a recent assessment, Kroll Bond Rating Agency (KBRA) assigned preliminary ratings to seven classes of mortgage-backed certificates linked to Angel Oak Mortgage Trust 2024-13, a transaction valued at $288.9 million. This non-prime residential mortgage-backed securities (RMBS) transaction includes a collateral pool consisting of 627 residential mortgages. A significant portion of these loans are characterized by alternative income documentation, indicating potential benefits and risks involved in underwriting processes. Notably, 36.1% of the loan pool originated from Angel Oak Mortgage Solutions and Angel Oak Home Loans, which are both subsidiaries of Angel Oak. Furthermore, no other originator contributed more than 15% to the collateral pool, illustrating a concentrated source of loans within this transaction's framework. KBRA's thorough rating approach relied heavily on various analytical methods. The agency conducted a loan-level analysis of the mortgage pool using its Residential Asset Loss Model (REALM), which is aimed at evaluating the potential losses associated with this pool of loans. This model enables a systematic understanding of risks and the overall health of the mortgage-backed securities. Additionally, KBRA performed an examination of results from third-party loan file due diligence to ensure the validity and stability of the mortgage pool. The agency also undertook cash flow modeling analysis to assess the transaction's payment structure, a crucial factor in determining the integrity and attractiveness of such investment vehicles. Alongside these rigorous evaluations, KBRA reviewed key parties involved in the transaction and scrutinized its legal structure and documentation to ensure compliance with regulatory and industry standards. Such thorough analysis is vital given the nature of non-prime mortgages, which often involve higher risk and underwriting complexities than prime mortgages. KBRA's decision-making process is documented in their U.S. RMBS Rating Methodology, which aims to provide transparency and detail for investors and stakeholders looking to understand the credit ratings. This new rating will have implications for how investors perceive the safety and performance of the residential mortgage-backed securities market, especially in regard to transactions involving alternative income documentation. As these ratings become public, they will inform investor decisions and the overall dynamics of the RMBS market, potentially influencing the accessibility and costs of mortgage loans in the larger financial context.