Hurricane Dorian starts seasonal risk for CMBS, RMBS properties

Could increase delinquency risk for short term

A new report from Fitch Ratings explained Hurricane Dorian, currently headed toward the East Coast, starts off the seasonal risk from commercial mortgage backed securities and residential mortgage backed securities.

Fitch explained that the hurricane isn’t expected to affect CMBS and RMBS ratings due to pool diversification, servicer advancing and insurance coverage, but the season could bring more risk.

“A hurricane season in which there are multiple severe storms may negatively affect loan performance if damage is widespread and severe and recovery is prolonged,” Fitch explained.

As the hurricane season ramps up, Fitch explained that properties along the East and Gulf coasts are vulnerable to damage from severe storms and surges. But the start of this year and Hurricane Dorian’s effects seem to be more mild compared to 2017, when Hurricanes Harvey, Irma and Maria hit different parts of the U.S.

But even when these hurricanes swept through U.S. coastlines in 2017, the effects on residential mortgage performance was temporary and delinquencies returned to pre-storm levels after about 12 months, according to Fitch.

“Approximately 2% of the loans by current balance in U.S. RMBS are located in the current forecasted path of Dorian,” Moody’s senior vice president Ola Hannoun-Costa said. “Property damage and borrower disruption from severe flooding and damaging storm surge would likely increase delinquency rates for affected deals.”

“However, performance in the aftermath of other recent hurricanes has generally returned to normal within 12 months, owing to help from insurance coverage and servicers’ proactive disaster management,” Hannoun-Costa said.

Fitch explained that over the past 30 years, natural disasters have not been significant enough to influence RMBS ratings.

“The geographic distribution of residential mortgage pools mutes the effect of natural disasters, as increases in delinquencies due to these disasters only affects a portion of the pool,” Fitch said. “Loan performance is also supported by private insurance, federal disaster funding and economic stimulus as a result of recovery, such as home improvements.”

Fitch explained that over the short term, hotels on the outskirts of these evacuation zones may benefit. Additionally, should hurricane damages cause longer-term relocations, multifamily and self-storage properties without damage in or close to affected areas could outperform given constrained supply from removed competition from those properties that experienced damage.

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