Impact of Hurricane Katrina
Despite the magnitude of the damage inflicted by Hurricane Katrina, we do not expect the credit performance of prime, Alt A, or subprime loans in the 10 MSAs to worsen in the remaining months of 2005. We identify numerous factors that should mitigate impaired credit performance:
- Mortgage hazard insurance policies with extended coverage should cover physical damage to houses caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike, and civil commotion. (These policies generally do not cover any physical damage caused by floods and other water-related causes.) In the event of destruction of the property, the servicer should apply insurance proceeds either to the borrower to rebuild the property, or to reduce the mortgage loan and any unpaid interest.
- Federal or private flood insurance should cover the physical damage by floods, mudflow, and subsidence on all mortgaged properties located in flood areas identified by the Department of Housing and Urban Development pursuant the Flood Disaster Protection Act of 1973, as amended.
- Servicers should have obtained hazard and flood insurance policies for borrowers who did not maintain such required policies. This forced placement of insurance policies is a customary servicing function. Failure to obtain such policies on behalf of borrowers may represent an act of default by the servicer under the terms and conditions of the pooling and servicing agreement of the related RMBS.
- Servicers should offer special relief measures to borrowers whose property is damaged, or income is affected. They should suspend mortgage payments for as long as three months, reduce payments for as long as 18 months, waive late-payment penalties, and not report suspended or late payments to credit bureaus. The Federal Housing Administration, Fannie Mae, and Ginnie Mae have already advised seller/servicers to offer such measures, and we expect non-agency lenders and servicers to offer them as well. Similarly, the Office of the Comptroller of the Currency and the Office of Thrift Supervision have encouraged national banks and thrift institutions, respectively, to adopt such measures to help borrowers affected by Hurricane Katrina
- Servicers are generally obliged to advance to the related RMBS the scheduled monthly payments of principal and interest that were not received from borrowers, which are reasonably recoverable from insurance payments or other sources.
- Borrowers are already eligible for disaster relief from the Federal Emergency Management Agency (FEMA), which includes funds for temporary housing, repair of damage that is not covered by insurance, replacement of a property that is not covered by insurance, and even improvements to reduce the risk of damage in future events
- Borrowers are also eligible for disaster loans from the Small Business Administration (SBA) for restoring or replacing real and personal property. The SBA is authorized to lend as much as $200,000 for real and $40,000 for personal property. These loans bear interest rates as low as 2.68% and terms as long as 30 years
- State and local government agencies will also offer borrowers certain financial assistance.
This data is provided for illustration purposes only. It does not constitute an offer to buy or sell any security.
Michael D. Youngblood, Ph.D.
Managing Director, Asset-Backed Securities Research
