The Securities and Exchange Commission on Wednesday said it fined mortgage firm Angel Oak Capital Advisors for misleading investors about its "fix-and-flip" loan securitization's delinquency rates.
The Atlanta-based firm and its portfolio manager Ashish Negandhi agreed to settle charges and pay penalties of US$1.75m and US$75,000, respectively. Angel Oak and Negandhi improperly diverted funds to cover up rising delinquencies on loans in a US$90m securitization issued in 2018, according to the SEC's order.
“Angel Oak and Negandhi failed to disclose the firm’s improper use of funds while continuing to issue larger securitizations, which painted a misleading picture for investors,” Osman Nawaz, chief of the division of enforcement’s complex financial instruments unit at the SEC, said in a statement.
The deal in question was a first-of-its-kind securitization of loans originated by an Angel Oak unit and extended to buy, renovate and sell – or fix and flip – residential properties, the SEC said. It included a provision that accelerates Angel Oak's obligation to return funds if delinquencies reach a certain level. Loan delinquency rates increased shortly after the deal closed, the SEC said.
Angel Oak and Negandhi "artificially reduced delinquency rates" by paying down outstanding loan balances with funds "ostensibly held to reimburse borrowers for renovations made to the mortgaged properties." By not disclosing this to investors, they provided an inaccurate view of the securitization pool's delinquency rates.
The SEC said Negandhi participated in the decision to approve the use of those funds. Negandhi did not immediately respond to a request for comment via LinkedIn.
Angel Oak is a regular issuer of RMBS backed by non-qualifying mortgages.
"While not admitting or denying the findings, Angel Oak Capital Advisors accepts the ruling set forth by the SEC relating to a 2018 securitization involving fix-and-flip mortgage loans," an Angel Oak spokesperson said in a statement. "The Angel Oak affiliate mortgage company has not originated these loans since 2019 and all senior noteholders in the securitization received full payment of principal and interest."