RMBS portfolios will not be widely affected by the Los Angeles wildfires, according to ratings agency analysts. Adequate residential insurance policies, measures taken by loan servicers, structural features designed to mitigate losses, and RMBS pools' overall geographical diversification limit the effects of higher delinquencies or losses in specific areas.
RMBS portfolios have limited exposure to loans in ZIP codes that were included in LA County's mandatory evacuation zones, according to Fitch Ratings. Non-prime loans, which have the highest exposure, only account for 1.18% of the outstanding $63.25 billion non-prime/non-QM collateral balance rated by Fitch, said Court Lake, a senior director in Fitch's RMBS team. In total, Fitch rates $275.95 billion worth of private-label securities RMBS portfolios in the U.S.
Fitch identified fifteen deals whose portfolios have exposures of 4%-9% in the mandatory evacuation zones, with the highest being Everbank 2013-01 at 8.66%, Lake said.
Non-prime loans account for 1.18% of the outstanding $63.25 billion non-prime/non-QM collateral balance rated by Fitch.
Although the wildfires are bound to lead to an increase in delinquencies and temporary interest shortfalls to bondholders, a few familiar structural characteristics support eventual repayment, Lake said. Interest for all classes—other than AAA—can be deferred. Non-QM loans benefit from strong credit enhancement structures. Other mitigating factors include servicer advancements as well as excess spread which can be used to cover periodic shortfalls or absorb collateral write-downs.
KBRA puts the exposure of its rated RMBS portfolios in ZIP codes affected by the wildfires at 1.3% of current balances.
"Twenty-four KBRA-rated RMBS transactions out of 637 rated transactions have over 5% exposure to properties located in affected counties," KBRA said in its "KBRA-Rated RMBS Exposure to Los Angeles Wildfires" report.
Analysts believe the vast majority of properties in the wildfire zone have hazard insurance, including coverage for fire and smoke with policies expected to be current due to servicer advancing and force-placed insurance protocols. Following natural disasters, servicers typically support affected borrowers through actions such as postponing foreclosure actions and offering payment assistance.
According to Morningstar DBRS's January 15 report "Los Angeles Area Wildfires Will Cause Record Insured Losses; Solutions to Address Insurability Are Needed", the LA area wildfires are likely to have caused $30 billion in insured losses. "The impact on leading California property insurers is likely to be significant but manageable, given the industry's diversified risk exposures and its access to global reinsurance capacity," the ratings agency said.
Insurance absorbs the blows
While deal structures are living up to their tasks of supporting MBS notes, the mortgage market has another issue that is only expected to worsen. Major insurers had already stopped issuing new policies, while regulators attempted to address affordability and insurability issues. Reinsurance costs are likely to be negatively affected as well, further challenging the ability of primary insurers to provide coverage, Morningstar DBRS said.
While the insurance industry has sufficient resources to cover current estimates of insured claims, the wildfires will significantly drive up the future cost of insurance premiums, according to KBRA.
After stabilization
After the wildfires, there could be some risk of higher premature prepayment of mortgages. There was a notable increase in prepayment speeds for properties damaged by previous California wildfires, compared to properties one to two miles outside the wildfire perimeter, according to "
The losses that are reported will be minor and will be disproportionately allocated to the most junior tranches in the RMBS pools.
"There could be a risk of borrowers prepaying loans if their insurance is insufficient to incentivize them to rebuild their homes," said Ed Reardon, Deutsche Bank's head of securitization research. However, given the low exposure of non-QM RMBS collateral to the wildfire ZIP codes, the impact of prepayment speeds is likely to be muted, Reardon said.
"There may be underinsurance, there might be prolonged disputes and legal fees plus other things that will add up to losses," he said. "But I think the losses that are reported will be minor and will be disproportionately allocated to the most junior tranches in the RMBS pools."
Fitch's Lake warned that there could be insurance shortfalls for prime jumbo mortgages with balances of more than $3 million, given that California's FAIR Plan caps benefits at $3 million. This is a syndicated fire insurance pool comprising all licensed P&C insurers in California, which acts as an insurer of last resort for people unable to get coverage. However, prime jumbo mortgage-borrowers are likely to have the financial resources to cover rebuilding costs, Lake said.
