AG Mortgage sees muted rebound in originations as acquisition remains pending

AG Mortgage Investment Trust reported some persistent lending challenges due to higher rates in the second quarter but noted that they were offset by some favorable buying, selling and servicing conditions.

As a result, net income that came in slightly below some analyst estimates but showed some stability investors overall seemed to favor with a slight rise in trading price, even though the status of a key acquisition for the company remained unresolved at deadline.

Jenny Neslin, the company's general counsel, said executives would not be commenting on AG's offer for Western Asset Mortgage Capital during the earnings call. The acquisition target had initially favored AG's bid, but Terra Property Trust countered with a sweetened offer last week.

AG owns a subsidiary that saw non-agency activity grow in the past quarter. That unit, Arc Home, saw loan funding bounce back on a consecutive-quarter basis to $400 million from $200 million in the seasonally-weak first quarter, when a banking crisis roiled the market. A year ago, Arc funded $600 million.

"We've seen the markets improve. That said, interest rates continued to rise throughout the quarter, bringing the higher-for-longer inverted yield curve back to the forefront and leaving the mortgage origination market challenge," said President and CEO Thomas Durkin.

However, the origination pipeline has been strong enough for the company to issue two securitizations in the third quarter, said Nicholas Smith, chief investment officer and director, during the earnings call.

Callable debt from past securitizations could have some benefit for the company as well, according to Smith.

"As outlined in previous quarters, the debt we issue of our non-QM securitizations is callable on or after the third anniversary of each transaction. Extreme yield curve inversion, coupled with historically wide spreads make this option very valuable by providing a potential path to pull forward these deep discounts in the coming years," Smith said.

Meanwhile, unrealized gains from the fair value of Arc's servicing portfolio were the primary contributor to $700 million in after-tax net income for the unit. This was offset to a degree by some operational strains on lending and servicing, according to the company's press release.

Like other REITs such as Redwood Trust, the company noted that loan sales from the banking sector present some buying opportunities. Also, some insurers have been eager to buy.

"We saw strong demand from balance sheet players, namely insurance companies who are looking for residential whole loan exposure without the intent to securitize," Durkin said.

AG sold insurers a mix of new originations and reperforming loans out of its 2020 book of business as it worked to reduce its exposure to the latter.

"The pending sale of RPLs is expected to settle this month, bringing in approximately $30 million in additional liquidity," said Durkin.

Overall, the company produced nearly $8.1 million in net income or $3.5 million attributable to shareholders in the second quarter, compared with net losses of $48.7 million and $53.3 million, respectively, a year earlier. First quarter 2023 equivalents were a positive $12.5 million and $7.9 million.

The company's shares were trading at $6.67 shortly after 1 p.m on the East Coast, according to Yahoo Finance. They'd opened the day at $6.53.