The biggest impact of the wildfires on the mortgage secondary and capital markets will be deals and their timing. Those could have an impact on warehouse costs.
Relying just on "the servicing notes can be a little tricky, because if they're on auto-draft, and the borrower is still making payments, but the building's razed to the ground, long term, is that going to end up being a good loan or a bad loan for a bond or a loan sale?" said John Toohig, managing director at Raymond James. "That'll be some of the noise that you kind of have to sift through."
The effect of the
"I don't think it would be an astronomical blip to getting a trade done, but, it would slow a trade down. It would cause the deal to be a little longer, just to make sure that all of the dwellings are still there," Toohig said. "Higher expenses to a deal, in theory, would require a higher rate."
Fires, like floods and other natural disasters have a major impact on a homebuyer's psyche, said Matt Schwartz, the founder of VA Loan Network in San Antonio.
For example, the company lends in the Houston area, which
"I can tell you that whether or not a home is in a flood zone is typically on a client's checklist of questions that they first ask a real estate agent," Schwartz said. "An area that is prone to fires could definitely become less desirable for new buyers, not only due to the potential for loss, but also the
As for the secondary market impact, Schwartz doesn't think much will happen at the government-sponsored enterprise level, "at least not in the short term.
"[in the] long run, could you see a 10-basis-point risk based pricing bump to [mortgages from] California? Sure, but in the scheme of things that 10-basis-point bump wouldn't necessarily change someone's rate, but instead their closing costs by a couple hundred bucks," Schwartz said.
The real issue in the secondary market is that higher homeowners' insurance premiums
William Tessar, the president and CEO of CV3, a private lender based in El Segundo, California, south of the affected areas, said doesn't think the wildfires would have any impact on pricing in the business lines it serves.
But it, like other lenders, has halted fundings in those and the surrounding areas until it gets a Form 442, an updated appraisal report to make sure the dwellings are in good shape as well as to make sure insurance is in place.
"We'll assess the impacts of any financing that we had done, both on our balance sheet and or that we had sold for loans that were in the target areas," Tessar said. "But there will be no surcharge from a pricing perspective."
If anything, when it comes to business-purpose lending, way more interested buyers are in the market than loans being originated nationwide, he said.
"That supply and demand pressure will keep pricing down,
Services are available that investors can purchase lists to see if an address is in the disaster zone, Toohig added.
So for a mortgage that is "newly originated or newly sold, there'll be an added layer of diligence to the trade for someone by having a check," Toohig said. Investors might also hire a real estate broker to have someone go out and do a drive-by, take a picture of the property to see if the building is still standing, and so the buyer will know whether they have a good loan or not, he said.
It is similar to what happened after Hurricane Katrina, or the even more recent storms of Helene and Milton, Toohig said.
As for the current rated transaction, a report from Kroll Bond Rating Agency notes that most have loans written to Fannie Mae and Freddie Mac seller guidelines.
The government-sponsored enterprises require loans they buy to have coverage for fire or lightning, windstorm and smoke. Private-label securitizations generally mirror the GSE provisions. If a homeowner misses a payment or lets coverage lapse, the servicer would either advance the premium or obtain forced-place coverage.
The GSE rules also require replacement cost value coverage rather than the lower premium alternative, actual cash value. Last May, they issued a joint blog post detailing their requirements.
There have been concerns that the rising cost of coverage and its availability could have both secondary and capital market impacts on mortgage lending in the future, precisely because of those requirements.
KBRA looked at the PLS deals it rated and found that while the average transaction exposure in its universe was 1.3%, 24 deals had more than 5% and two with over 10%.
The report also noted the standard policy from both GSEs regarding homeowners affected by natural disasters.
"The measures typically include up to 12 months of forbearance, waiver of late fees, suspension of credit reporting, and a halt on foreclosure activity," KBRA said. "While these programs offer vital support to affected homeowners, they can also impact the payment performance of PLS transactions if present in significant concentrations."
Approximately 3% of the total RMBS that Moody's Investors Services rates are backed by properties in the Los Angeles County area.
"Additionally, about 30% of the total deals we rate have over 10% exposure to this area, with approximately 83% of those deals being pre-2009 legacy RMBS transactions," Moody's said "Among the deals with over 10% exposure to Los Angeles County, 71% have the highest outstanding ratings below investment grade, and 58% of them are rated Caa1 or lower."
But many of those properties might not be currently in the path of direct fire damage, it added.
"For homes that are impacted, property damage will likely result in a temporary increase in delinquencies for the deals with larger exposures," Moody's said. "However, insurance coverage, servicers' proactive disaster management and FEMA's financial assistance will help mitigate potential losses."
The hazard insurance requirements are a backstop for mortgage borrowers who are subject to damage from the fires and could default on their loan, said Jeremy Schneider, managing director, Standard & Poor's Global Structured Finance Ratings.
"Ultimately, the extent of materiality will depend on when the fires stop," Schneider said. "In reviewing the last reports we have seen from various sources, approximately 12,000 structures have been lost, and when looking at the number of one-to-four unit residential residences in Los Angeles County it seems to be about 2.5 million. So based on these numbers, which again are an approximation from various sources, for now the scale is small."
Michael Kelleher, currently a mortgage industry consultant and Courtney Thompson, the executive vice president of servicing at CMG Financial, created a video on the former's Instagram channel, the MikedUp Show, with advice for consumers on how to contact and work with their servicer if they were affected by the wildfires.
If more questions come up, Kelleher said he would be happy to make another informational video with Thompson. Besides the Instagram show, the video (which was originally in four parts)
Both Fannie Mae and Freddie Mac
The Freddie release reminded servicers that disaster relief options are available to borrowers whose property is outside of the declared disaster area but the home has incurred a disaster-related loss that affects the ability to make a monthly mortgage payment.
The Fannie Mae release had similar statements.
"If homeowners have been impacted by the fires, we encourage them to call their mortgage servicer for assistance as soon as possible," said Cyndi Danko, senior vice president and chief credit officer, single-family at Fannie Mae. "Homeowners and renters can learn more about disaster relief resources, including personalized support, by contacting Fannie Mae's free disaster recovery counseling services."
