Nearly two months after Hurricanes Harvey and Irma struck Texas and Florida, causing billions of dollars of property damage, there’s still little information on how securities that reinsure mortgages for Fannie Mae and Freddie Mac might be impacted.
Hurricane Harvey made mainland U.S. landfall on Aug. 25 and Hurricane Irma on Sept. 11, so the first payment date where borrowers in those areas may be affected would be Sept. 1. However, Fannie and Freddie report 30-day delinquencies with a two-month lag, so that information will not be available until the end of this month.
Kroll Bond Rating, which rates many of these securities, has cobbled mortgage servicer remittance reports to come up with its own estimates. It thinks that late payments on mortgages reinsured through Freddie’s bellwether Structured Agency Credit Risk may have risen by 35% to 40%, albeit off a very low base, leaving the average delinquency rate under 1.0%. Moreover, Kroll expects that much of the impact will prove to be temporary, and is unlikely to result in ratings downgrades.
The companies that collect payments for these mortgages have already distributed their September reports, and Kroll used them to created proxy pools for mortgages referenced in Freddie’s Structured Agency Credit Risk notes. To test the accuracy of its models, Kroll used the proxy pools to approximate delinquencies for prior pay periods and compared them to actual delinquencies reported for STACR transactions; it observed very few instances of large discrepancies.
(Kroll also created proxy pools for Fannie’s Connecticut Avenue Securities, but when it used them to approximate prior delinquencies, it observed a number of discrepancies.)
The rating agency concluded that 30-day delinquencies on STACR likely rose by approximately 38%, on average, from August 2017 to September 2017.
That’s not nearly as bad as it might sound.
Delinquencies are starting from a low base; in the case of STACR-DN, Kroll estimates late payments rose to 0.55% from 0.41%. In the case of STACR-HQ, which reinsure mortgages with high loan-to-value ratios, it estimates the average increase to 0.82% from 0.58%.
In both cases, delinquencies remained below 1.0% percent.
Moreover, there’s some seasonality at play. When Kroll screened out loans in areas affected by the hurricanes, late payments on the remaining loans in these pools – in other words, those not affected – rose 15% in September over August.
Eric Thompson, a senior managing director in Kroll’s real estate group, said that late payments dip in August and bounce back in September - almost the same way they do in April when tax refunds put more cash in borrowers’ hands, “but to a lesser degree.”
Thompson said this suggests that not all of the delinquencies reported on loans in affected areas were necessarily the result of the hurricanes; these borrowers might have fallen behind on their payments anyway.
Moreover, Kroll expects many of the early delinquencies to cure over time.
That’s not to say there won’t be serious delinquencies and losses from home damage, “but in many cases, property insurance is a substantive mitigant,” Thompson said. “Right now, we’re not expecting the magnitude of serious delinquencies to contribute to downgrades.”
One unexpected takeaway from the data was how many borrowers take advantage of grace periods for payments.
“It was a surprise to see that so many borrowers in areas affected by Hurricane Irma missed their Sept. 1 payment, given how late in the month the storm struck,” Thompson said. “I would have thought more people would have paid already or used ACH.”
However, "It’s hard draw any conclusions about what this might mean for longer-term delinquencies or potential losses.”
