Dorian Marks Start of ‘Seasonal Risk’ for Mortgage-Backed Securities Risk

Slow-moving, powerful Hurricane Dorian has dominated the news for nearly two weeks; now, as it moves off the East Coast and into history, analysts have begun to assess its impact.

Fitch Ratings, New York, said Hurricane Dorian is not expected to affect commercial mortgage-backed securities and residential mortgage-backed securities ratings due to pool diversification, servicer advancing and insurance coverage. However, Fitch said with Dorian marking the start of a hurricane season in which multiple severe storms could occur might negatively affect loan performance if damage is widespread and severe and recovery is prolonged.

“As the hurricane season ramps up, Fitch properties along the East and Gulf coasts are vulnerable to damage from severe storms and surges,” Fitch said. “At this point it appears Hurricane Dorian’s impact will be more modest than the hurricanes of 2017. The effects of these hurricanes–notably Harvey, Irma, and Maria–on residential mortgage performance was temporary, and delinquencies returned to pre-storm levels after about 12 months. This is consistent with recovery trends observed in prior natural disasters.”

Fitch said natural disasters over the past 30 years have not been significant enough to influence RMBS ratings, saying 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. Loan performance is also supported by private insurance, federal disaster funding and economic stimulus as a result of recovery, such as home improvements.

Fitch said the most significant damage in the wake of Hurricane Dorian appears to be on the Bahama Islands, which Fitch does not have exposure to within its North American CMBS or RMBS ratings portfolio. Dorian’s effect on the U.S. mainland remains uncertain, “but we expect to receive Significant Insurance Event reports from CMBS master servicers within two to three weeks of the event,” it said. “These reports track the status of insurance claims and repairs. Fitch continues to monitor more than $6 billion of rated CMBS exposure to more than 1,200 properties across Florida, Georgia, South Carolina and North Carolina with the potential to be affected by Hurricane Dorian.”

Fitch said CMBS ratings reflect servicer advancing and strong sponsorship among the larger exposures. Additionally, all CMBS loans each require specific levels of insurance coverage for various risks depending on property location. However, the amount covered for a particular property and event will be policy specific.

“In prior events, servicers have confirmed instances where claims were denied because damage was caused by events outside the scope of coverage,” Fitch said. “In addition, business interruption coverage only applies if the damage is covered under the policy. Widespread damage could cause a bottleneck of insurance claim evaluations and repairs.”

In the near term, Fitch said, 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,” it added.