Damage estimates have hit the $15 to $20 billion range in the wake of Hurricane Charley. Miles of manufactured houses were destroyed, thousands of residents were displaced and businesses caught in the path remained shuttered up at press time, sidetracked from normal operations by an extensive cleaning-up effort and repair work.

As for signs of a short-term effect on the fixed-income market, Charley appeared far less damaging. No rating agencies detected any immediate fallout in the ABS market, according to spokespeople from Fitch Ratings, Standard & Poor's and Moody's Investors Service, in sharp contrast to the bill Charley rang up - the Insurance Information Institute found Charley was the most costly storm to hit the U.S. since Hurricane Andrew walloped the eastern coast in 1992, racking up $15.2 billion in damages.

"Fitch does not anticipate any problems on existing RMBS deals. In addition to the presence of flood insurance and federal funds mitigating any adverse repercussions, Fitch-rated transactions generally do not have large concentrations of Florida mortgage loans," said Joanne Sokolowski, managing director, RMBS, Fitch Ratings. "Additionally, new RMBS transactions contain warranties guaranteeing that a property is not damaged," she said.

Manufactured housing collateral obviously bore the brunt of the devastation, but in terms of performance in loan pools, there was little evidence of any fallout due to the already deteriorated collateral perfomance.

"To the extent that borrowers were affected by Hurricane Charley, it would be more of a default impact on some of the pools if borrowers can't pay their mortgages," said Moody's Pramila Gupta. Severity of that impact will depend on whether borrowers had insurance. "If they have insurance, the pools are not going to sustain severe losses," Gupta said. Mortgage borrowers also have access to FEMA disaster-related assistance as well, she added.

In the catastrophe-bond market the effects of Hurricane Charley have been fairly muted. Properties exposed to damage in Florida comprised a smaller region that what is typically seen in hurricane storm tracks in the south, according to James Doona, director, insurance capital markets at Standard & Poor's.

"Charley moved more rapidly than a typical Florida hurricane and had a narrower than usual track," said Doona. "The landfall of the storm was also crossed a relatively less populated region than other areas of the state."

While $1.16 billion in outstanding CAT bonds could be theoretically impacted, said Doona, it appears that insured damage from Charley was not gong to reach a level that caused reduction in principal in any of the CAT bonds rated by S&P.

However, about $512 million were issued by special-purpose entities known as "Residential RE" to cover USAA, an insurer that primarily services military service people and their families, with a high concentration in Florida. All of these Residential RE notes are structured to respond directly to USAA's losses over various "indemnity-based" thresholds, versus the typical "parametric" type of CAT bond, Doona explained. Holders of the indemnity-based notes will not know the precise loss profile due to Charley for 12 to 18 months; USAA estimates a likely worst-case scenario at $200 million to $300 million, added Doona, well below any threshold for the various Residential RE notes.

And not unexpectedly, the CDO market did not experience any fallout, with no downgrades issued last week and no reports of ill effects on any deals ramping up, sources said. "Given the geographic diversity in most deals, it probably isn't significant in terms of a hit to any single transaction," said Merrill Lynch CDO researcher Dan Castro.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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