Katrina’s Impact on Mortgage Industry

Standard & Poor’s Ratings Services recently announced its preliminary evaluation of 3,629 outstanding transactions that were issued between January 2000 and September 2005 with original exposure to the four states hardest hit by Katrina.

The ratings agency expects the hurricane’s impact on U.S. residential mortgage-backed securities to be relatively limited.

“Our primary rating criteria requires issuers and sellers to have the proper representations and warranties in place for all loans in a trust at closing,” said credit analyst Terry Osterweil, an S&P director of the RMBS Ratings group, in the announcement. “These reps and warranties must state that the homes are in good repair, flood insurance is in effect when necessary, and that hazard insurance is in place.”

The law reportedly requires that federally regulated mortgage lenders ensure that houses in a designated flood zone have and regularly renew flood insurance for the lesser of $250,000 or the outstanding principal balance of the loan less the land value.

Apart from built-in, risk-insulating features on loans, S&P said mortgage-servicing policies will also assist in issues that will arise from the hurricane, such as “handling delinquency advances, property inspections, forbearance plans, and filing of insurance claims,” as well as in administering “any federal aid that is distributed for properties in the affected areas.”

The combination of such risk-mitigating factors will either eliminate or reduce potential losses for a majority of the deals that include affected mortgages, S&P reported.

The overall impact on U.S. RMBS is also expected to be relatively nominal due to the limited concentration of loans in those areas, according S&P credit analyst Robert Pollsen.

“Upon examination, we found that hundreds of these had no loans in Alabama, Louisiana, and Mississippi,” Pollsen said in the announcement. “It’s also been widely reported that there were no areas in Florida that were categorized by FEMA as federal disaster areas.”

In line with S&P, Mark DiRienz, managing director of Moody’s RMBS group, recently told MortgageDaily.com, that while Moody’s is still in an information-gathering phase, it also does not expect Katrina to have a significant impact on existing or future RMBS transactions.

DiRienz explained that loans from affected areas “simply just don’t represent a significant percentage of any [existing] transaction,” and he also pointed to the representations and warranties new deals coming to the market generally have. Additionally, issuers that are concerned about investors are voluntarily excluding loans of the affected areas from securitizations at this time, he added.

Fitch Ratings appears to be on the same train of thought as it recently said in an announcement that on certain insured structured finance exposures, such as residential mortgage-backed securities and manufactured housing loans, it “does not envision material credit deterioration or incurred losses with respect to structured finance exposures, due primarily to the diverse nature of the majority of the underlying collateral.”

The recent hurricane, however, will cause an increase in delinquencies, given the high level of personal tragedy, the general destruction of local infrastructure, and the loss of employment, S&P said.

The Mortgage Bankers Association, which posts information on its mortgage lender resource center about what HUD, Ginnie Mae, Fannie Mae, Freddie Mac and other prominent industry organizations are doing and advising in respect to the hurricane, recently reported that national mortgage delinquency begun its expected ascent in the second quarter and that it will gain momentum due in part to Katrina.

MBA chief economist Doug Duncan said in a conference call Thursday an estimated 360,000 loans valued up to $48 billion could be directly or indirectly impacted. However, he described the effect would be an “uptick in delinquency rates over the next few quarters in the states impacted by Hurricane Katrina, especially Louisiana and Mississippi.”

Angelo Mozilo, chief executive of the nation’s largest mortgage originator Countrywide Financial Corp., recently commented that the company expects financial losses to exceed those caused last year.

“The Company’s hurricane losses in 2004 were approximately $70 million, and expectations are that the financial impact of Hurricane Katrina will exceed that amount,” Mozilo said in a press release. “We are continuing to focus on assisting our customers and employees as they deal with the hurricane’s aftermath.”

But, Insurance Information Institute Vice President Loretta Worters told MortgageDaily.com mortgage companies should not be significantly affected by the housing losses caused by Katrina. For example, about 40 percent of the homes in the city known as the Big Easy, which lies below sea level, have flood insurance.

“Most of the damage in the New Orleans area will be from flooding,” Worters said. “If part of the damage is sustained from (hurricane) winds and partly from flood both homeowners insurance and the [National Flood Insurance Program] would pay for it.”