In the wake of Hurricane Sandy, delinquency rates are expected to rise in RMBS deals.
Even with preliminary estimates projecting the total economic losses from the hurricane to be over $20 billion, analysts expected to see a “modest and temporary increase in mortgage delinquency rates,” according to an Oct. 31 report from Fitch Ratings.
The rating agency said that based on RMBS performance in the aftermath of Hurricane Katrina — which struck the Gulf Coast in August 2005 and caused total economic losses close to $100 billion in a region smaller than that affected by Sandy — it expects mortgage delinquency to rise dramatically in the areas directly affected by Sandy.
According to Fitch, in the case of Katrina, delinquency rates nearly tripled to 45% from 17% of all loans outstanding. But within a year, as people temporarily displaced returned home, these borrowers received their insurance proceeds. Additionally, as businesses returned to normal, delinquencies improved to 25% in the areas affected — roughly a 1.4x increase to the level of delinquency prior to the storm.
“Although the disruption caused by Sandy will likely prove to be significantly less than that caused by Katrina, a similar 1.4x delinquency increase in the areas most affected by Sandy would generally have a modest overall impact on RMBS pools since the states of New York, New Jersey and Pennsylvania account for only roughly 12% of outstanding RMBS mortgage loans,” Fitch analysts said.
Ron D’Vari, CEO and co-founder of NewOak Capital Markets, said that Hurricane Sandy's arrival fell exactly on the monthly mortgage payment period. In other words, due to business disruption, many borrowers can take advantage of payment waivers. “It is not clear how this will get reported [in deals],” he said. “Others will use this as an excuse to delay mortgage payments, possibly to finance some holiday spending.”
CoreLogic said that, according to its storm-surge analysis that is based on the projected path of Hurricane Sandy, nearly 284,000 Mid-Atlantic homes valued at roughly $87 billion are at risk ofproperty damage from the hurricane. The estimate, however, measures only damage from storm surge and does not include potential damage from wind and rain associated with hurricanes.
According to CoreLogic’s breakdown, at least 81,000 properties valued at $35.1 billion are at risk in New York State. In New Jersey, more than 75,000 properties valued at roughly $22.6 billion are in danger.
“Even though we are able to narrow our estimates of properties at risk, the number and value are an indication of all properties that were at risk in the area covered by the center of the storm,” said Tom Jeffery, senior hazard scientist for CoreLogic spatial solutions. “We chose this narrower area based on the geography that experienced the highest surge levels. It extends from northern New Jersey up through Long Island.” Jeffery added that Hurricane Irene, which hit the U.S. East Coast in August 2011, generated a maximum of about 4.5 feet of surge in some parts of this area. Sandy doubled that in many areas and nearly tripled it in a few. The highest surge values that have been reported are about 12–13 feet. “What that tells me is that the surge water was able to move much farther inland and affect not only properties farther from the coast but also homes built on higher ground, doing much more damage than Irene,” he said.
SIFMA Closes Bond Markets
An immediate impact of the storm was its disruption to activity in fixed-income markets, which were closed early on Oct. 29 and all day Oct. 30 at the recommendation of the Securities Industry and Financial Markets Association (SIFMA).
Kevin Howell, an analyst at FTN Financial, said on Oct. 31 that short-term trading in CMBS, for instance, was relatively light after the storm, and he expected that pending transactions were going to be delayed.
Among the deals that were slated to price over the week Sandy hit was the $1.05 billion bond backed by the Blackstone Group’s Motel 6 hotel portfolio, which was expected to price Nov. 2. JPMorgan and Deutsche Bank led the deal. Barclays and UBS Real Estate Securities’ $835 million, single-borrower CMBS deal called BB-UBS Trust 2012-SHOW was also slated for the week of the storm and priced on Nov. 1.
“Typically what happens in these markets is if something doesn’t happen today it will roll to the next day,” said Tim Ryan, president and CEO at SIFMA, in an Oct. 29 CNBC interview.
Howell believes that once securitization desks are fully staffed again, it is likely that spreads will be modestly wider while the direct impact of the storm is sorted out.
“The general consensus seems to be that most of the affected properties were likely covered by disaster insurance, but it will take some time for the specifics to emerge,” he said. “Assuming this is true, I expect that the market will revert back to its recent strength. Generally speaking, the underlying value of CMBS relative to competing asset classes will be unchanged.”
D’Vari said that financing and closing delays can push potential deals to the next year, but the deferments will be deal-specific. He added that these interruptions will be offset with the “rush to finish” the securitization market normally experiences near year-end as issuers look to get loans off balance sheets.
There seems to have been less of an impact on the consumer ABS side. Citigroup Global Markets analysts said on Nov. 1 that spreads in the sector remained unchanged over this "Hurricane-Sandy-shortened week.” Citi analysts added that the low level of secondary trading that took place seemed to be a function of it being month-end instead of a directional shift.
They also reported that more than $4 billion of new-issue ABS transactions were announced once the markets reopened on Oct. 31. The list of deals included a five-year credit card offering, a FFELP SLABS, a diversified dealer floorplan ABS and an auto loan ABS transaction.
As far as the indirect effects of the storm, Sandy will certainly impact unemployment in the area, as businesses directly affected by the storm are expected to lay off people until they can find alternative plans and facilities.
RMBS and CMBS are sensitive to the fragile U.S. economy and employment. In the short term, D’Vari believes that the economic losses due to disruption will be bigger than the actualproperty losses. “So there will be slower economic growth first due to business disruption (estimated to be $20 billion to $30 billion over and above the actual losses), and [securitization] deals with large concentrations in the Northeast would be more affected,” he said.
Howell echoed the sentiment and said that this business disruption comes at a very critical time of the year and might further jeopardize financially unstable properties. “For example, it's not hard to imagine that retail sales for the important holiday season will be impacted in those areas affected by the storm,” he said. “For certain retail properties that were already struggling, this could push them closer to default.”
But D’Vari also sees an upside. Over the longer term he is optimistic that the storm can, in fact, stimulate construction and that the economic boost from post-storm repairs will exceed the initial economic slowdown.
“Net-net by next year, the storm's impact is estimated to add to the GDP growth,” he said. “The catch is that the actual property losses don't get counted in the GDP.”