Fitch: GSE Risk Transfer Ratings Likely Unaffected by Hurricanes

Fitch Ratings, New York said Fannie Mae’s and Freddie Mac’s limited exposure to areas affected by Hurricane Harvey and Hurricane Irma makes negative rating actions for GSE Credit Risk Transfer transactions unlikely.

However, Fitch cautioned expected temporary rise in delinquencies could slow the rate of positive rating actions for some classes until there is greater clarity on the extent of the risk and the rate of recovery.

Hurricanes Harvey and Irma struck Texas and Florida, respectively, in early September. Conservative estimates put property damage for both storms at between $150 million and $200 billion.

Fitch noted roughly 5% of CRT reference mortgage pools are located in FEMA-declared disaster areas with a range of 2.8% to 6.9% for Fitch-rated transactions. The limited exposure coupled with a credit enhancement cushion for many of the existing ratings should mute any potential rating impact.

Both Fannie Mae and Freddie Mac have suspended all active foreclosures and evictions for 90 days within the affected areas, and have enabled servicers to offer forbearance and repayment plans for up to 12 months for eligible borrowers.

Fitch said it expects residential mortgage delinquencies in the affected areas to increase significantly in the coming months before recovering relatively quickly. “Peak delinquencies typically occur about two or three months after a major event,” said Fitch Managing Director Grant Bailey. “While delinquencies remain higher over time than prior to the event, most troubled borrowers recover or prepay within 18 months. This pattern was similar for borrowers in private-label securities affected by Hurricane Andrew in 1992, the Northridge earthquake in 1994, Hurricane Katrina in 2005 and Hurricane Ike in 2008.”

Bailey added even if borrowers affected by Harvey and Irma performed twice as poorly as borrowers affected by Katrina, losses when measured as a percentage of the total mortgage reference pool would likely be limited to less than five basis points across all transactions (for both “fixed-severity” and “actual-loss”)–an amount not large enough to meaningfully influence the credit risk of the rated classes.