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Interview with Sam Dunlap

Sam Dunlap, managing director and senior portfolio advisor at Angel Oak Capital Advisors, commented on the Housing Finance keynote speech and policy session of the 2019 Financial Markets Conference. Conducting the interview was Jessica Dill, director of the Atlanta Fed's Center for Housing Policy.


Jessica Dill: Good afternoon. My name is Jessica Dill, and I am the director of the Center for Housing Policy at the Federal Reserve Bank of Atlanta. We're here today at the Financial Markets Conference, and I'm speaking with Sam Dunlap. He is a managing director and senior portfolio advisor at Angel Oak Capital Advisors.

Sam, would you like to talk a few minutes about Angel Oak Capital Advisors and what you guys do, just at a high level?

Sam Dunlap: Absolutely. Thanks for having me. It's been an excellent conference. Angel Oak has been happy to represent and participate. At Angel Oak, we're a fixed-income manager. We are a registered investment adviser located in Atlanta, Georgia. We focus on, predominantly, the U.S. structured credit markets. We have a keen focus on mortgage credit, in particular. We also are a very active participant in the new, non-agency market, which is often affectionately known as the non-qualified mortgage market, which was a big topic here today at today's housing panel.

Dill: Sam and I just finished listening to the CEO of Freddie Mac, Don Layton, give a keynote speech. After Don's speech, we moved into a policy session that highlighted the housing finance system and how that's been evolving. Sam, could you share with us a few themes or takeaways from this morning's session?

Dunlap: Absolutely. Thank you. I think it's very timely, given the recent news in the headlines about the potential path for the GSEs [government-sponsored entities] out of conservatorship. It's been a long way up to this point. A key theme for us ahead of the conference, and during the conference today, and on the panel, was the expiration of what's known as the qualified mortgage [QM] patch. So the GSEs, basically through the QM patch and through their purchase activity, are accumulating—about 30 percent of their production would be considered non-qualified mortgage.

That's been a growing concern for market participants as well as the regulatory community, because most of that production is nonqualified because of its debt-to-income ratio, which is above 43. It'll be interesting to see the private markets' appetite for that type of production if the QM patch expires, but also just, will the QM patch, in fact, expire after a potential path through conservatorship? So it's an interesting intersection between the potential appetite in the private markets and the GSEs' influence within the QM and non-QM percentages.

The other key takeaway, I think, too, up to this point, is, really, the GSE reform has been slowly happening throughout the postcrisis period, and it's been quite effective, as the panel suggested—most notably, the success of the CRT [credit risk transfer] program from the GSEs. It's been well embraced by market participants like Angel Oak and other asset managers around the world. I think it will be a continued successful, key way that GSE reform continues beyond conservatorship.

Dill: Sam, that's really helpful. I wonder, were there any lingering questions, things that didn't get addressed on today's panel?

Dunlap: One of the lingering questions as it relates to the qualified mortgage and non-qualified mortgage market is the challenge, if you will, on satisfying the ability to repay and the ultimate liability, so to speak, that mortgage lenders—both nonbank and bank lenders alike—potentially face if a borrower were to ever default on a mortgage. The ability to repay is challenged in the court system. We had a ruling recently, an Elliott case in Ohio, that actually was ruled in favor of the lender for successfully calculating ATR [ability to repay].

That does answer some questions, at least in the early court rulings, about—once a lender satisfies the ability to repay, that can potentially remove the inability for them to foreclose on the home. That's a pretty significant event in the mortgage market, through this one recent ruling. But it'd be nice to hear a broader discussion on what that ultimate liability looks like, especially as the GSEs head out of conservatorship and this non-QM production starts to enter the private market, particularly as the QM patch expires.

Dill: That's great. So, are there any other takeaways that you'd like to conclude on, based on today's session?

Dunlap: One final key takeaway that I think is very important, from the broader panel—and just a theme, I would say, overall from the conference—is, given the overall solid pace of employment momentum in the underlying economy, mortgage credit has generally been pristine. I think from the panel, particularly as it relates to the GSE reform that's happened slowly through CRT, you can see the performance in CRTs has been extraordinary. That also is evident across all mortgage credit, which continues to perform quite well.

It is an excellent time to have some of these discussions, as far as the GSEs potentially exit conservatorship. The mortgage credit process has improved materially, and I think that was evident on the panel as well. You're starting to really see that in the performance of mortgage credit, whether it's CRT or in the potential emerging private label market—all those are very good things for the economy, and also the mortgage credit system as we look ahead.

Dill: Sam, thank you for your time and participation at the Atlanta Fed's Financial Markets Conference.