Fitch Ratings is considering making adjustments to property valuations used in sizing up private residential mortgage securitizations to better account for possible exposure to uninsured, catastrophic risks.
“Over the last couple of years there have been some pretty significant hurricane events and those have created questions from investors,” said Grant Bailey, an RMBS analyst at Fitch. “What we heard from investors was: ‘The recent hurricanes were bad, but more severe natural disasters are possible. How is that considered in the rating analysis?'”
While natural disasters to date have tended to temporarily increase delinquencies for 12-18 months, they historically have not affected ratings, Bailey said.
The proposed move would more explicitly model potential losses from natural disasters and could incrementally increase the amount of credit enhancement Fitch would require for some private-label residential mortgage-backed securities deals to obtain top ratings.
This could help better protect investors in rated RMBS from losses stemming from natural disasters, but potentially add an incremental cost to financing affected mortgages through the private securitization market.
The measure would “have a modest impact on most RMBS due primarily to the geographic diversity of the mortgage pools” and is expected to leave existing ratings unchanged, according to a company press release.
“The proposed new adjustment is an additional penalty layered onto the existing rating stress assumptions that already include catastrophic risk implicitly,” Fitch said in the release. “The new adjustment is intended to better distinguish between RMBS with different levels of estimated natural disaster risk, but is not intended to be a primary rating stress.”
Uninsured risks the analysis would focus on include losses from storm surges, flooding and earthquakes, as opposed to risks more typically covered by homeowners insurance such as fire or wind damage.
Fitch would assess the risk using a natural catastrophe model licensed from AIR Worldwide, aka Applied Insurance Research.
The company is accepting comments on the proposal, with a July 5 deadline for input.