Sandy Damage Estimates Shrinking, But Some PL RMBS Bear Risk

Hurricane Sandy’s impact on the private-label residential mortgage-backed securities market won’t be systematic and estimates for it are shrinking under closer examination, but certain bonds here and there will have some exposure, according to recently released Opera Solutions research.

“A lot of what we’re finding…comes down to the idiosyncracies of the individual bonds,” said Jon Di Giambattista, a vice president at the company, in an interview with this publication.

Exposure occurs where there are comparatively high concentrations of collateral mortgages in the areas that were inundated and there also is “a more precarious position in the capital structure” under stress scenarios the company applied using its Mobiuss data and analytics platform, he said.

“There were just a handful of bonds where there could be some movement in the either value of bonds or amount of credit support that they have,” said Bill Hunt, head of research at Opera, told this publication. “Those were very idiosyncratic. They had to [be] near a cusp where, if there were any incremental losses, they would start taking [a hit]. If that wasn’t the case, then it really wasn’t a huge impact.”

The higher-risk junior bonds in the capital stack are more frequently the ones exposed in certain deals, but “in some cases—very, very few actually—some of the bonds in the so-called senior part of the structure could take a bit of a hit,” said Bill Hunt, head of research at Opera, noting that in some cases mezzanine bonds have some exposure as well.

“You have to be very specific with respect to (particular) bonds,” he said. “The way that most of the MBS transactions work is that they are highly tranched in terms of different securities having different payment priorities, and because the market itself has been beaten down pretty badly to date—just by…the credit crisis and housing value declines and all of that—a number of bonds were already going to be hit pretty hard before the storm even happened.”

Hunt said the findings are based on stress testing of the collateral based on the market’s experience with Hurricane Katrina, Federal Emergency Management Agency flood maps, and painstaking examination beyond the individual ZIP code level based on FEMA information The New York Times presented as color-coded visual map of exposures.

Within the Red Hook ZIP code, for example, while one area “was pretty much underwater,” during the storm, “just up the street…a few other neighborhoods [were] completely untouched,” he said.

Hunt noted that the full impact of the storm will not be certain for some time.

“No one’s really going to know until all the address level assessments have been done and…the insurance companies and claims have started to get paid out,” he said.