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Drop Off Fiscal Cliff Would Harm MBS

Report looks at impact to RMBS, CMBS

Dec. 20, 2012

By Mortgage Daily staff


As the U.S. economy braces for the prospect of severe tax increases and spending cuts, investors of commercial and residential mortgage-backed securities could face securitization deterioration.

Many expect the healthy dose of spending cuts and revenue increases that would result if the government fails to avoid the so-called fiscal cliff would thrust the economy back into a recession.

While President Obama and House Speaker John Boehner (R-Ohio) have been meeting to work out a deal that would prevent the country from going over the fiscal cliff, the two sides remain at an impasse just days before the deadline.

Federal Reserve Chairman Ben S. Bernanke, who brought attention to the issue when he used the phrase during testimony before the House Committee on Financial Services in February, warned the congressional Joint Economic Committee in June that the "severe tightening of fiscal policy" that would occur in January if no deal is reached would "pose a significant threat to the recovery."

"Moreover, uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence," the Fed chief said.

A report announced Thursday by Moody's Investors Service, Recession Resulting from a Fiscal Cliff Would Weaken US Securitization Performance, indicated that failure to resolve the fiscal cliff would have a negative impact on most securitization sectors.

"The scale of fiscal policy tightening in the event of the fiscal cliff would result in the U.S. falling back into recession in early 2013, with consequence for the domestic and global economy and therefore structured finance," Moody's Structured Finance Group Research Director Andrew Jones said. "U.S. fiscal policy poses significant risks to domestic economic activity, which is a major driver of securitization performance."

Private-label RMBS performance would suffer as a result of higher unemployment and lower home prices, according to the report. RMBS delinquency would increase.

The ratings agency noted that the rate at which borrowers who have always been current are becoming delinquent had improved to 8.5 percent per year as of August. But that rate will jump to 10.8 percent -- the same level as in late 2011 -- if the United States takes the dive off the fiscal cliff.

Residential delinquency of at least 30 days, including loans in the process of foreclosure, has fallen to 10.64 percent as of October from 12.22 percent a year earlier, according to data provided by Lender Processing Services Inc.

Moody's warned that the fragile recovery underway in commercial real estate would slow if the fiscal cliff isn't averted -- impacting CMBS.

Morningstar Research reported that 30-day CMBS delinquency has fallen to 7.723 percent as of October from 8.346 percent a year earlier.

Performing CMBS loans that mature during the next few years would be more difficult to refinance, and CMBS loss severity would increase, according to Moody's.

The multifamily sector, which is furthest along in the recovery, would face slowing rent growth. Rental growth among other types of CRE, which is expected to occur after 2013, would be delayed by between one and two years.

CRE properties housing businesses that are heavily dependent on government contracts would be hit especially hard.

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