As the breadth of damage inflicted by Hurricane Katrina remains largely unknown to both those on scene and those within the financial sector, ABS industry analysts are thus far projecting a relatively modest impact on mortgage and home equity loan markets. A more substantial affect is however anticipated throughout the economy as rising gas prices and the likelihood of another federal interest rate hike later this month threaten to stifle economic expansion expectations and the rate of consumer spending.
In particular, low-to-moderate income earners - largely those that patronize the subprime lending arena - are expected to feel the sting of rising interest rates and gas prices.
"The consumer will be hit," said John Silva, chief economist at Wachovia Corp. in a Sept. 6 conference call. Silva said the low-end retail sector and automotive sector could take a slight blow as well.
Speculation that the Federal Open Market Committee may choose to cease tightening in its Sept. 20 meeting is winding down following comments by several voting members last week that point to the contrary. Chicago Federal Reserve President Michael Moskow suggested as much in a Sept. 7 speech, saying that inflation still must be contained through "appropriate monetary policy." Some in the industry had hoped that a temporary pause in rising short-term interest rates could prolong the existence of a housing bubble.
Mortgage and insurance companies, not to mention the federal government, are expected to absorb the cost of damage to homes in the affected areas. Investors in securities backed by those residential mortgages should be little affected.
Analysts point to federal and private dollars as key to eliminating substantial incidence of default. And mortgages in the states affected - Louisiana, Mississippi and Alabama - constitute a miniscule portion of the market in both size and number. In fact, the total dollar amount of all mortgage originated in those three states last year amounts to less than $900 million, equal to the amount one would expect on a single deal, according to UBS. The total number of subprime loans outstanding in the region amounts to $6.9 million, about 1.9% of all currently outstanding subprime collateral. Prime and Alt-A loans amount to about $4 million, about 1.37% of outstanding, according to UBS.
Deals with the largest subprime MBS concentrations of outstanding balances - exceeding 15% - in the three states, according to RBS Greenwich Capital's Peter DiMartino, include Emergent 1997-4, with a 15.4% concentration and $16.4 million balance as of July; Provident 2000-01, with a $97.3 million balance as of July and a 15.2% concentration; FASCO 1999-A at $9.6 million and a 15.1% concentration. Those pools with the largest outstanding balances showing concentrations to the affected region top out at Wells Fargo's series 2004-2 deal, with a 2.40% concentration; the deal has an outstanding balance of roughly $4 billion. Park Place 2004-2, at $3.6 billion, has a 1.50% concentration, and the $3.6 billion Park Place 2004-WWF1 rounds out the top three with a 1.50% concentration.
Loan performance in this relatively small group of affected securities may not be too bad, if one were to forecast performance based on past incidents. "The few sad precedents we have are encouraging," said Michael Youngblood, head of ABS research at Friedman Billings Ramsey.
Youngblood added that the performance of area economies in the wake of such disasters as the Sept. 11, 2001 terrorist attacks, as well as previous hurricanes, indicate a similar rebound will take place in this scenario. Faced with an onslaught of four hurricanes and a tropical storm last year, Florida's infrastructure surrounding mortgage finance "worked," Youngblood said, indicating that the same resiliency inherent in the market will show itself in the aftermath of Katrina.
The portion of non-agency mortgage loans considered seriously delinquent did not rise in the 20 metropolitan statistical areas in Florida last year, despite the rash of hurricanes. Subsequently, credit performance in the sector should not decline throughout the remainder of 2005, Youngblood added.
In the 10 MSAs declared by President George W. Bush as major disaster areas, loan performance was generally in line with the national average. As of June, the weighted-average serious delinquency rate of prime loans was 0.2%, about 0.05% higher than the national average. Alt-A loans were 0.93% seriously delinquent, a 0.12% margin over the national average, and the portion of subprime loans seriously delinquent in the area, at 4.2%, was lower than the national average by 1.29%, according to FBR. Certain areas, however, came in significantly higher than the national average.
Lafayette, La. borrowers, for example, show a 3.81% delinquency rate in the Alt-A arena, and 11.2% in the subprime space. Of the 10 MSAs, Hattiesburg, Miss., is considered a particular problem area for persistently high serious delinquency rates. Miami, touched over briefly when Katrina was still a category-one storm, is the only area hit considered to be experiencing a housing bubble as of the first quarter, according to FBR.
Servicers have been urged by the federal government to allow borrowers to skip mortgage payments in order to avoid instances of default, late fees and other repercussions. Both Fannie Mae and Freddie Mac have announced plans to keep the mortgages in the most affected areas out of default. Freddie announced that servicers of Freddie owned mortgages may allow borrowers to skip as much as one year's worth of mortgage payments, if they reside in a major disaster area. The GSE is also promoting that servicers waive fees and not report incidence of default to the rating agencies, in order to secure customer credit scores.
Art Frank, head of MBS research at Nomura Securities, estimates that outstanding mortgage balances in the Gulf coast region constitute about 1.2% of FNMAs, 0.7% of FHLMCs, and 1.5% of GNNAs. Principal and interest payments will be forwarded to investors throughout the skipped payment periods.
Likely the biggest concern to mortgage investors in this region is the likelihood that borrowers will prepay. The brunt of prepayments as a result of insurance payoffs will likely hit investors in November and December, according to Nomura's Frank. If the area's mortgages prepay at 75 CPR for those two months, overall FNMA speeds would increase to roughly 1 CPR, FHLMCs to 0.6 CPR, and GNMAs to about 1.2 CPR during the time period, he said.
"It doesn't really have a great impact on the mortgage market as a whole," Frank said.
While homeowners insurance does not typically cover flood damage, homes in federally tagged flood zones are generally required by mortgage lenders to acquire the insurance.
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