By the Numbers
California fires likely to have muted impact on private-label RMBS
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California’s current wildfires look likely to have a muted impact overall on private-label MBS trusts, although a significant number formed in 2008 or before could see material losses, at least as a percentage of current principal balance. Most of the trusts vulnerable to material losses have only a few loans left. These conclusions reflect estimates by Webbs Hill Advisors of securitized loans in ZIP codes affected by the fires.
Small impact on private-label MBS overall, but larger in legacy and RPL trusts
To date, the fires have affected a total of 12,000 structures including single-family homes, commercial properties and detached structures, according to Webb Hill. Even assuming conservatively that all the structures are single-family homes, they would represent only 70 bp by count of the 1.7 million loans outstanding across the private-label MBS (Exhibit 1).
Exhibit 1: Impacted PLS collateral by percentage and principal balance
Source: Santander US Capital, Webbs Hill Advisors, CoreLogic LP
The most meaningful impact should come in the legacy market—trusts formed before the 2008 Global Financial Crisis—where only a few affected structures can make up a large percentage of loans remaining in the trust. The most concentrated exposure appears to be in prime trusts created from 2003 to 2005.
While these legacy deals with low loan counts may have outsized exposure, potential losses are likely to be limited. Loans backing these trusts carry low LTVs given significant amortization and home price appreciation. Additionally, since most are in prime trusts, they tend to be performing and do not carry significant amounts of trapped servicer advances that would haircut potential recoveries to borrowers. In fact, given the relatively low leverage, bondholders in effected trusts will likely recover any outstanding forbearance on these loans at payoff in addition to the performing balance.
Certain RPL trusts also look like to see noticeable impact. Some Towd Point RPL securitizations issued as recently as last year contain anywhere from $30 million to $40 million of collateral in potentially affected areas. While these deals maintain the largest amount of absolute exposure, their contribution to the overall collateral pool is relatively small as they represent between 3.7% and 8.7% of the December outstanding balance. The near-term impact to these, and other trusts with affected loans, is likely a spike in delinquency rates and related interest short falls to deeper subordinate classes of these deals as the servicer does not make advances of principal and interest. Mortgage liens against impacted properties will, by and large, remain in place and insurance proceeds will be disbursed to the servicer and subsequently to borrowers who chose to repair or rebuild their homes. Alternatively, borrowers may choose to sell the property and relocate, which would result in a prepayment of the performing balance of the loan and any associated forbearance with the remaining equity disbursed to the borrower. Substantial borrower equity, coupled with increased carrying costs associated with higher insurance premiums, may ultimately serve to be a catalysts for impacted loans to ultimately prepay from these pools, offering upside on cash flows now trading below par.
Impact across private-label shelves
Based on available information for different securitization shelves, the impact, particularly when measured by forecasted net losses, appears muted. However, there are admitted unknowns to this analysis, namely the potential expansion of the impacted area and the lack of ZIP code-level transparency in certain shelves. Shelves that may be of particular concern are the ARRW and PRKCM shelves in non-QM MBS as they generally have larger concentrations of loans in Southern California. Larger issuers who do not provide ZIP code-level disclosure include dealer shelves like CSMC, CMLTI, JPMMT as well as the JPMorgan CHASE shelf. Other notable shelves include ADMT, CIM, PRPM and VERUS, where the absence of a five-digit ZIP makes it difficult to triangulate potential deal-level exposure.
While the near-term impact is likely a spike in delinquency rates on impacted collateral, the loss of these housing units should acutely impact the existing housing shortage in Los Angeles county. The displacement of upwards of 200,000 people will likely drive a spike in rental costs in areas adjacent to the impacted areas, which may ultimately be a credit positive, particularly for investor DSCR loans. Additionally, these events will likely be a catalyst for change of both the structure and pricing of property insurance in the impacted areas. The presence of private insurers in impacted areas has retracted materially over the past year as state-imposed caps on premiums drove certain carriers to reduce their exposure. The removal of these caps would likely bring back private capital at the expense of higher costs which could, in turn, reduce affordability, increase turnover or both.
Agency CRT exposure
In the agency MBS market, exposure to impacted areas in Freddie Mac’s STACR trusts accounts for just 2 bp of outstanding reference collateral, according to analysis released by the agency, and 3.1% of outstanding collateral when including the much broader Los Angeles County FEMA assistance area.
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