The bust in oil prices has jeopardized local economies in heavy oil-sector regions of the country. Might the volatility do the same to mortgage-backed securities, should massive layoffs in the industry give rise to a surge of homeowner defaults by energy industry workers?
Standard & Poor’s thinks not – even under extreme circumstances of the entire oil-sector workforce defaulting on their jumbo home loans securities in the three states with the greatest exposure to the pools of 59 S&P-rated RMBS transactions from 2012-2015.
In a study of the potential impact on falling oil prices on prime jumbo residential mortgage backed securities, S&P found that recent price-in risk of loss activity in jumbo RMBS with major exposures to oil-producing states may be overinflated. What the ratings agency instead found was that the exposure of incremental collateral pool losses would be negligible.
“It remains unclear whether the additional spread on bonds with high concentrations of loans in oil-producing states relative to comparable transactions without this exposure reflects the actual excess risk,” the report stated.
S&P’s measurements found that California, Texas and Colorado presented the greatest exposure in securitized RMBS of oil and gas workers who have jumbo prime mortgages (jumbo loans are those that exceed the conforming loan limits for purchase by Fannie Mae or Freddie Mac).
California, which has only 0.13% of its population employed in energy-related fields, it has a 43% exposure in the 59 pools due to the high volume of California-originated loans. The positions of Texas (at 4.02% pool exposure) and Colorado (third at 2.47%) in overall jumbo RMBS collateral in the deals is a factor of the higher percentage of workers each state has in oil and gas.
Despite those high levels of exposure, the worst-case of potential pool-wide loss severities (based on a $750,000 mortgage) to the aggregate collateral pools was a maximum 0.07% – or $11 million out of approximately $16 billion in unpaid collateral balances. That scenario involved the (unlikely) complete dissolution of all oil-related employment in those three states.
“We are agnostic as to the pricing of prime jumbo RMBS and therefore do not explore whether or not the alleged trend of spread widening on particular bonds with oil exposure is warranted,” the report stated. “However, the simple study undertaken here suggests that pool-wide losses resulting from heavy defaults in the oil industry workforce of three major oil-producing states should be very low.”
The study did not account for any projected impacts of defaults in industries with ancillary ties to energy, in the event of a disappearance of all oil-and-gas sector jobs in those economies.
“The negligible incremental losses we calculated suggest that even if we accounted for these additional factors, the total expected losses would still be relatively mild,” the report stated. “Furthermore, Standard & Poor's rating analysis of RMBS collateral pools takes geographic concentration into account. As such, excessive exposure to particular areas would result in appropriate adjustments to our loss projections.”