Sandy Aftermath: Insurance Coverage to Set RMBS Defaults
November 2, 2012
In a report released this morning, Citgroup Global Markets said that the number of RMBS delinquencies that eventually default resulting from Hurricane Sandy will mostly depend on how much damage will be covered by insurance.
Analysts said borrowers with property damage have to divert cash to make the necessary repairs while they wait for insurance payments to arrive. This will probably cause delinquencies to increase over the next few months, particularly for subprime borrowers who are on shakier footing financially.
Citi explained the flood damage is a specific concern since it is not covered by homeowner’s insurance. Borrowers are only required to purchase flood insurance if they live in a special flood hazard area (SFHA).
Although homes that sustained the most damage are probably going to be in a SFHA, Citi said that a lot of the impacted householdss were probably outside the SFHA given the storm's unprecedented nature .
Additionally, Citi said that flood insurance does not cover fences or patios and offers only limited coverage for basements. Thus, those affected homeowners might be facing considerable out-of-pocket costs.
Meanwhile, a Bank of America Merrill Lynch report released this week projected 24,000 non-agency properties with about $8.4 billion in unpaid principal are located n the zip codes most hit by floods.
For the purposes of their analysis, researchers used zip codes along the Jersey Shore, in Staten Island, the Rockaways, Long Beach, and Jones Island/Fire Island areas.
Although BofA Merrill analysts expect that Sandy's effect on the non-agency universe would be modest, transactions with high concentrations of loans from the hardest hit areas might be adversely affected by further timeline extension in the impacted areas as the damage is assessed and certain foreclosure proceedings are temporarily stopped.
They said that, as it is, analysts said that New York and New Jersey already have some of the longest timelines in the country. Ultimate recoveries might depend on the extent of the damage, insurance coverage and proceeds, and government aid.
A main driving forces behind recent price appreciation in these areas has been the lack of inventory available in the market, so the added delays in already lengthy foreclosure proceedings might result in to short-term price appreciation.