Sreeni Prabhu: Yeah. Matt, I’ll take this one and Namit, jump in if you want to add to it. But look, I mean, we’ve always told people that in a non-QM of today is not the subprime of 2007. And in a combination of full underwriting of credit, loan to values in the 70s, true appraisals, et cetera., et cetera., when you originate a loan and you have all these qualities that you’re underwriting, your risk of default goes low. Now that being said, look, if we are going to go in a higher recession, we’re not naïve to think that there will be delinquencies in defaults. I mean, that’s going to happen through a cycle, right? It’s just a matter of when and how it happens. But the new originations that we have, by the way, just so we have gone really up in credit.
And not just in the way across our franchise, we have almost slowed down our investor cash flow loans. We are not doing — I mean, we’re not doing high LTV loans at all. We are very, very conservative in terms of what we’re originating, as of right now. But so we are clearly conscious that even though we think that the credit is good, you definitely need to tighten your credit even more going into a potential recession. We know that and we are thoughtful about that. But Namit, you have more details on that because you talk to the mortgage company about credit almost daily.
Namit Sinha: Sure. Yeah. So to Sreeni’s point, like there is an aspect in mortgage credit of the quality of loans that you originate, right? And so when we talk about our average FICO scores being 740 plus and our average loan to values in the low-70s. These are attributes that sort of look similar to agency originations. Quite different from the historical knowledge and the originations that used to happen in the pre-global financial crisis period. And these loans have performed really, really well. They’ve hardly had any losses in the last seven, eight years of our originations. Now, if we do go into a bumpy macro environment, as Sreeni mentioned, we do expect some increase in delinquency. But if you have a book with where the delinquency numbers are running with a 1% handle and we go into a recession and that delinquency goes up like 50%.
You’re still talking about a delinquency that is close to 2% and that is not a huge distraction from the return potential of these loans, especially when you think of the loan coupons that are being originated, right? We are talking about a 9% coupon being originated with a 740 plus FICO and 70 LTV. And if you have — and because of the current market spread, these loan prices have remained very suppressed. So if your delinquencies go from 1% to 2% it does not take much. I mean, if you do them rough math around it and let’s say that marginal extra 1% loans, default at a 50% rate. So now you have an extra 50 basis points of default. You apply 50 severity. You have an extra 25 basis points of loss. Spread over three years, that’s a 8 basis point reduction in loan yield.
That’s hardly anything when you look at the current coupons on these loans. So yes, in any macro environment which goes into a recessionary period, no matter what the quality of the loans, you’re going to see a percentage sort of increase in delinquencies. But given the platform, given the loan under writing, given the quality of these loans, that number is not expected to be where some of the earlier non-agency programs used to go to in prior tough periods.
Matthew Howlett: Yeah. I’ll certainly see the disconnect between, what you’re seeing what the market is anticipating. Last question, just a quick update on Angel Oak Mortgage to mortgage company? Do you feel like the right size, the platform? Do you feel like it’s in position to grow on 2023?
