Uncategorized
Little prepayment surge likely in wake of Hurricane Florence
admin | September 14, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Relatively low exposure to areas most likely to get hit by Hurricane Florence should protect most agency MBS investors from significant changes in prepayments.
Hurricane Florence came ashore in North Carolina on Friday as a Category 1 storm with 90 mph sustained winds. High population areas inland from the North and South Carolina cost may be affected if Florence stalls over land until Sunday and causes catastrophic flooding. Hurricane warnings have been issued along the coastline as far south as Hilton Head Island, South Carolina, and as far north as Virginia, expanding the potential scope of affected areas.
The agency MBS market has only a small number of pools concentrated in these states. For example, 90% of outstanding pools have less than:
- 5% exposure to North Carolina
- 1% exposure to South Carolina
- 8% exposure to Virginia
Few investors look likely to own a pool or bond with a large exposure to these states. North Carolina loans are currently 2.8% of outstanding balance and Virginia is 3.6%, so both are on the larger size, but South Carolina is only 1.3%.
Moreover, the large population centers in all three states tend to be inland. The most severe force of the storm and the most severe flood risk look likely to affect less populated areas. Only a fraction of the mortgages in these states should face the largest risk of damage or of borrowers facing job loss or other hardships due to the storm. It is unlikely that an investor’s exposure to these states is concentrated in coastal areas.
Finally, many loans that initially default will likely be given time to recover, helping to protect investors from an immediate spike in prepayments. Fannie Mae, Freddie Mac, Ginnie Mae, and the government agencies (FHA/VA/USDA/PIH) have various tools at their disposal to assist borrowers affected by a natural disaster. Fannie Mae and Freddie Mac can, and likely will, permit loans to remain in pools after the typical 120-day delinquency buyout trigger. The experience of hurricane Maria on Puerto Rico pools shows that recovery rates can be very high.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
