The widespread damage along the Mid-Atlantic and Northeast coast from Hurricane Sandy should not cause any lasting effect on RMBS performance. However, it might result in a modest and temporary rise in mortgage delinquencies, Fitch Ratings said in a report released late today.
Although the total damage figures from the Hurricane Sandy-induced storm will not be known for some time, several preliminary estimates have pegged the total economic losses at over $20 billion.
To assess the storm's effect on RMBS performance, Fitch looked to Hurricane Katrina, which wreaked havoc on the Gulf Coast in August 2005. This hurricane caused more than 1,800 deaths and the total economic losses from it neared $100 billion even though the region was smaller than that affected by Sandy.
The rating agency said that, in the months right after Katrina, mortgage delinquency increased considerably in the directly impacted areas, almost tripling to 45% from 17% of all loans outstanding.
However, within a year, as people temporarily displaced returned home, these borrowers received the insurance proceeds. Additionally, as businesses went back to normal, delinquency quickly improved to 25% in the areas affected. This is approximately a 1.4x rise to the delinquency level prior to the storm, Fitch reported.
Although the disruption caused by Sandy will probably prove to be significantly less than that caused by Katrina, a similar 1.4x delinquency rise in the areas most affected by Sandy would, for the most part, have a modest overall effect on RMBS pools given that the states of New York, New Jersey and Pennsylvania only comprise about 12% of outstanding RMBS mortgages, according to the agency.
Second-homes will probably be disproportionately impacted along the coast, but second-homes within the states most-affected by the storm only comprise roughly 1% of the total mortgage pools on average.
Additionally, the rating agency thinks that servicers are currently better equipped to handle short-term hardships versus the way they were in 2005. This is because of the considerable investments in mitigation and modification programs in the last several years.
Because of this, long-term payment problems caused by a short-term disruption are less probable with Sandy versus Katrina. The rating agency does not currently expect placing any RMBS classes on Rating Watch because of the storm. But, damage assessments are still preliminary and Fitch will be closely monitoring related developments.