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Fitch Ratings: Election results mixed for structured finance

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Stimulus and regulatory actions are the main ways in which government policy in the wake of the elections will impact structured finance, according to Fitch Ratings. The degree to which they are affected will depend heavily on Georgia runoff elections Jan. 5, Fitch says in a Nov. 16 report titled, “Effects of 2020 Election Results on U.S. Structured Finance.”

The course of the pandemic and economic recovery will play significant roles in determining the delinquency and default rates impacting structured finance, the report says. What’s in store on those fronts is impossible to foresee, but controlling the spread of the virus is expected to be a top priority of President-Elect Joe Biden’s administration. Should it find success, Fitch says, consumer confidence will increase and consumers, commercial tenants, lenders and originators will be able to plan further ahead, “a positive for ABS, RMBS and CMBS.”

Failure to control the coronavirus that results in more lockdowns, especially if Republicans limit federal aid, could negatively impact employment and “already struggling ABS and CMBS sectors, particularly retail and hotel assets,” according to Fitch.

Should Republicans retain both Georgia Senate seats, the divided government will moderate Biden’s stimulus and policy agenda, Fitch says.

In terms of stimulus, flipping Georgia’s seats and thus control of the Senate to Democratic control could benefit structured finance in several ways. Democrats would likely pass a larger second round of stimulus than Republicans, who instead are anticipated to seek a more limited package.

“Given the lingering high levels of unemployment, growing coronavirus cases and slower economic growth expected in 4Q20, anemic federal aid will not materially alleviate financial stress for individuals and businesses,” Fitch says.

Not all asset classes fare equally during a pandemic. Consumers tend to prioritize auto and mobile-device payments compared to other student and unsecured installment loans, which Fitch notes “saw a greater take-up of payment holidays.”

Student loan deferrals may remain at elevated levels given the options introduced to provide consumers experiencing financial hardship to adopt longer-term repayment terms due, Fitch says, so while Federal Family Education Loan Program (FFELP) loans are guaranteed and unlikely to default, student ABS payments may slow.

Mortgage deferral and forbearance programs under the Coronavirus Aid, Relief, and Economic Security (CARES) Act have enabled borrowers to stay current, and most resumed payments when their payment holidays ended. CMBS multifamily renters will face pressure without another round of federal aid, but, Fitch says, this should marginally impact properties in CMBS transactions.

Limited federal aid may increase credit-card balances if weaker borrowers use their cards to pay other debt or for expenses, increasing the severity of defaults. So far, however, borrowers have acted prudently, and credit balances have actually decreased since the beginning of the pandemic, Fitch says.

On the regulatory front, structured finance investors could see mixed results, Fitch says. For example, collateralized loan obligations (CLOs) could benefit if the Biden administration restricted leverage levels, potentially increasing the credit quality/rating mix of leveraged loans in those portfolios. However, Democrats’ student-loan forgiveness proposals, also affecting private student debt, could adversely impact investors by significantly increasing prepayments.

Longer term, a Biden administration’s health care priorities would indirectly benefit structured finance, especially if Democrats gained control of the Senate and bolstered the Affordable Care Act’s provisions. Fitch says that reducing large healthcare expenses that hinder consumers’ ability to meet other financial obligations is positive for consumer credit and ABS performance.

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Election 2020