If government officials cannot resolve their differences and the U.S. heads over the much-ballyhooed fiscal cliff, policy tightening would lead to a recession in early 2013, affecting securitization performance, according to Moody’s Investors Services.
In particular, higher unemployment rates and a decline in home prices would lead to higher rates of delinquencies in mortgage pools backed by residential mortgage-backed securities, ultimately erasing the improvements made over recent months within the sector.
The rate at which current borrowers become delinquent declined about 8.5% per year in August. However, the fiscal cliff could potentially lead to an increase in this rate closer to the 10.8% per year level of (), Moody’s forecasted.
Co-head of Agency MBS Strategy Jeana Curro at Royal Bank of Scotland Global Banking & Markets (RBS) told HousingWire that should the fiscal cliff hamper economic growth, credit sectors would potentially suffer while less-credit sensitive sectors would do well.
“In this case, we would expect to see an underperformance in nonagency MBS, especially to the extent that any kind of fiscal-cliff recession would stall the housing recovery,” she said. “Also in this scenario, we would expect agency MBS to outperform as investors scale back risk, and we would also expect issuance trends to favor agency over private label.”
Commercial mortgage-backed securitization would also be another area negatively affected by the fiscal cliff, setting back the recovery that has taken place among property sectors backing CMBS loans.
The recession could potentially “lower the prospects for refinancing performing loans maturing in the next few years and increasing the severity of defaulted loans.”
The primary risk of the fiscal cliff is a potential jump in instability and the implications for the new issue CMBS market, director of CMBS Strategy Richard Hill at Royal Bank of Scotland Global Banking & Markets, told HousingWire.
“Issuance this year has been strong and consistent primarily driven by investors demand for longer duration, fixed-rate assets against a backdrop of historically low interest rates,” he said. “However, if volatility was to increase it has the compounding impact of making it more difficult to originate loans coupled with increase liability costs as hedging is somewhat challenging.”