Fitch: Hurricane-Hit Residential Markets Quickly Recovering

U.S. residential markets affected by strong hurricanes in 2017 are trending toward recovery, said Fitch Ratings, New York.

Fitch said the speed of this recovery is expected to spare residential mortgage-backed securities from rating downgrades.

Fitch noted while the level of total outstanding delinquencies in U.S. RMBS remains elevated in the hurricane-affected areas, the rate of new delinquencies, which measures the monthly percentage of borrowers that were previously current and are now delinquent, has recovered quickly to levels seen before the storms.

The report said new delinquency rates in the affected areas had been 2% in September and peaked at 6.8% in November. However, they fell back almost as quickly as they rose and now are near the national average of 2.3% as of January (including legacy Prime, Alt-A and Subprime RMBS).

“The reversion in the rate of new delinquencies is significant, as it slows the growth of total outstanding delinquencies and marks the beginning of recovery,” said Court Lake, analyst with Fitch’s Structured Finance Group.

The report said while the rate of new delinquencies has recovered, it will likely be a number of months before the total amount of outstanding delinquent loans recovers to pre-storm levels. Delinquencies (30+ days) in FEMA designated disaster areas increased to more than 30% from November through January from 25%. They remain elevated when measured as a percentage of all outstanding US RMBS (including all products across Prime, Alt-A and Subprime).

“The timing of the recovery of total outstanding delinquent loans will be driven primarily by the timing of forbearance modifications,” the report said. “Many of the initial three-month forbearances offered by the GSEs (Freddie Mac and Fannie Mae) are likely to have ended in January. After this initial three-month forbearance period, when borrowers are not required to make a payment, most borrowers will likely accept a loan modification that extends the loan’s maturity by the number of delinquent months.

The modifications become permanent upon the borrower’s completion of a standard three-month trial period. That will come to an end in April for most borrowers, resulting in expected improvement in total delinquency by late spring or early summer.

Fitch said exposure to the disaster areas varies within U.S. RMBS transactions, averaging roughly 11% in outstanding non-agency RMBS and 7% in Fitch-rated GSE credit risk transfer transactions.

Fitch noted data from prior natural disasters indicated that residential mortgage delinquencies in the affected areas tend to increase significantly in the first few months before recovering relatively quickly. Peak delinquencies typically occur about two or three months after a major event. While delinquencies remain higher over time than prior to the event, most troubled borrowers recover or prepay within 18 months.