Colorado disasters leave homeowners, RMBS investors in limbo
50,000 properties linked to RMBS transactions
Severe natural disasters struck Colorado in recent weeks, causing a trail of damage that prompted residential mortgage-backed securities investors to search for areas of potential exposure within mortgage securitizations.
Some RMBS investors are exposed to properties in the disaster-declared area, but the risk seems minimal at this point, Morningstar analysts concluded.
Within the nine FEMA-designated 'disaster area' counties, approximately 50,000 homes are attached to 4,756 RMBS transactions, dated from 1993 to 2013. The total exposure, as calculated by outstanding loan balance, hit roughly $9 billion. Keeping this in perspective, the impacted deals represent only 1.08% of the entire nonagency RMBS universe, Morningstar said.
More than 75% of the affected homes were securitized between the financial crisis heyday of 2005 and 2007.
Although the overall exposure of nonagency RMBS properties to this event is relatively small and insurance proceeds should be available to cover some losses, investors should be aware of the potential impact on individual bonds — especially prime bonds with less credit support, Morningstar explained.
Nearly 19,000 homes experienced damage, but it's too soon to tell how RMBS investors will be impacted, Morningstar said.
While President Obama and the Federal Emergency Management Administration greenlighted nine counties in Colorado for government assistance, it’s important to note that only 1% of homes located in what’s called the ‘100-year flood zone’ are covered by flood insurance — leaving the rest of the homeowners to receive protection through private insurers.
It could take anywhere from six months to a year to fairly account for property assessments, given the size of the disaster area, explained Tom Jeffery, a senior hazard analyst with CoreLogic.
In an extreme case of total property loss — 100% loss severity — losses could be as high as 34% of current senior credit support, Morningstar suggested.
For Jeffery, who covers these hazards nationwide, one of the lingering issues is what happens to these homeowners in the future. Will they be allowed to rebuild in the same areas?
Two opposing views have surfaced, says Jeffery. Some have said you should rebuild wherever you want, while others say those receiving government assistance should not be allowed to build in the same area if their property's reconstruction is funded by the national flood program.
"I think what we’re going to hear more about is not whether someone can or cannot rebuild, but whether the government will subside the insurance for the property at the same rate as a private insurer," Jeffery said.
He concluded, "If the flood insurance program raises rates that allows them to work so they are getting enough money to fund the program, will they also mandate mitigation?"