With the recession now in high gear, Fitch last week presented its outlook on the RMBS market in light of the deteriorating economy.

During the session, panelists presented their outlook on the housing sector, focusing on the regional differences that paint a very different picture from the national housing trend.

Analysts also focused on historical data to draw comparisons between recent experience and the behavior of the housing market in the previous recessions that the country has been through. They emphasized that not all recessions are equal in terms of the length of the downturn as well as other factors such as GDP percentage declines and unemployment peak rates.

The panelists also dealt extensively with the effect of Sept. 11 on the economy and the RMBS sector. They stated that the attacks accelerated the decline of the economy, which they said peaked in March.

Geographical differences

Mark Lauritano, managing director at DRI-WEFA, said that "Economic and housing market performance varies significantly by geography." He added, "Because the factors driving recession change, new winners and losers will emerge."

The differences in each region are exemplified by the fact that the regional markets suffered from severe job losses for varying reasons. The job losses in metro areas like San Jose and Boulder - which experienced the biggest drops in employment figures - was due to the plunge of the high-tech industry. Las Vegas' unemployment problem, on the other hand, was due to the decline in tourism activity post-Sept. 11, while Detroit is experiencing heavy unemployment because of problems in manufacturing, which showed the earliest signs of decline among the employment sectors.

Regional differences also factor into the volatility of home prices. One factor that David Stiff, chief economist at Case Shiller Weiss, mentioned was the diversity in market psychology in the different regions.

Depending on the existing conditions in a particular region, people would have varying expectations of what home prices should be. There are also other factors that come in to play, such as building regulations and the volatility of the local economy.

Life after Sept. 11

To study the effects of the World Trade Center and Pentagon attacks on RMBS, senior director at Fitch Susan Kulakowski explored the geographic distribution of economic risk for mortgages.

She cited Los Angeles, which has the largest, single geographic source of RMBS loans, as having some risk factors but remaining a diversified economy and maintaining stable housing markets.

Though there are certain metro areas that are currently risky because of economic factors, many of these areas have small contributions to MBS deals. In other words, the effects of the deterioration in these regions is minimized in terms of mortgage-backeds. Atlanta, for instance, has some risk right now because of the decline in air travel and hotel occupancy, but this risk will have minimal impact on MBS.

Forecasting tricky in this environment

DRI-WEFA's Lauritano said that forecasting the future of the mortgage market is difficult in this environment because of several unknown factors such as the number of possible terrorist attacks that may still occur and the uncertainty with regards to consumer and business confidence.

He added that there are a number of factors that would shape the mortgage cycle, which include: a technology investment crash, a post-attack drop in travel and tourism, the expected moderate economic downturn, the improved household balance sheets that keep foreclosures under control and the eventual robust recovery that is anticipated.

In her presentation, Fitch's Kulakowski also mentioned some factors that may affect the mortgage market adversely, citing the U.S. recessionary economy as well as industries (e.g., hospitality, tourism and air-travel related) that were greatly affected by the attack.

However, there are several good things going for the mortgage market. Because mortgage rates are down, refinancing volume is up, thus allowing lenders to tighten credit standards because they don't have to compete for market share.

On the RMBS front, Kulakowski said that there would likely be slight increases in regional foreclosure frequencies. Aside from this, she said that credit enhancement levels in RMBS deals would also likely increase for some loans.

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