The 8.8-magnitude earthquake that shook a long swath of Chile on Feb. 27 left damage that could work its way into ABS deals, sources said. The most vulnerable asset class is related to real estate, including deals backed by residential mortgages and lease-to-own contracts, but there are safeguards that should help transactions avoid serious deterioration.
"All of the collateral we rate has earthquake insurance," said Juan Pablo Gil, an analyst at Fitch Ratings in Chile. He added, however, that the individual deductible would be the higher of either 1% of the estimated loss or 25 inflation indexed units ($1,000). This is the amount that the insurance company deducts from its payment after assessing the cost of damage. While not exorbitant by local standards, the amount a homeowner would have to cover could test those with fewer resources or those who have to make other emergency payments as a result of the earthquake.
Homeowners in this predicament may not end up fixing all the damage, potentially leading some to be dissatisfied with the state of their home and making them more prone to disrupt payments.
Fitch rates six deals backed by lease-to-own contracts and two deals backed by mortgages. The lease deals have LTVs between 50% and 80%, while the mortgage deals have exceedingly low LTVs, with the figure near 20% for one of the transactions. Still, Gil said the agency expects an increase in delinquencies as well as longer periods for foreclosing and selling properties. Prices could fall as well.
Cristobal Oyarzun, an analyst with local agency Humphreys, said that the agency had re-evaluated 15 of the 20 real estate-related securitizations it rates in the wake of the quake, and so far there were no negative rating actions. "It's possible that we'll have to put some on observation," he said, but added that that was not a foregone conclusion.
Oyarzun pointed out that most of the pools were in Santiago, whereas the epicenter of the earthquake was in the eighth region, about 225 miles away. While there was extensive damage in Santiago, it is not clear that losses will be catastrophic.
Security Securitizadora is apparently one of the local securitizers with the most to worry about in terms of potential exposure to losses. Humphreys rates three deals from Security with between 14% and 16.5% of their portfolios backed by housing in the sixth through eighth regions, the areas most affected by the earthquake. Fitch rates another deal from Security that has 21% of its portfolio with exposure to the eighth region.
Presently, primary servicers are still in the process of collecting information from homeowners to assess the extent of the damage.