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Earthquakes and California MBS

According to Fitch Ratings [1], recent California earthquakes should have no impact on the ratings of Residential Mortgage Backed Securities (RMBS). Fitch notes that less than 1% of Fitch-rated RMBS pools have exposure to the areas affected by the earthquakes. Fitch states that less than 1% of Fitch-rated RMBS pools have exposure to the areas affected by the earthquakes, noting that the multiple earthquakes in California last week were in sparsely populated areas.

Within the affected areas, Fitch does expects the impact on residential mortgage performance to be modest, and according to Fitch’s data, natural disasters since 1990 have only had a temporary influence on borrower behavior, with delinquency typically returning to pre-disaster levels within 12-18 months.

According to Fitch, future natural disasters may bring about more risks, and may impact mortgages more drastically moving forward.

“The relatively limited amount of time residential borrowers have been affected by natural disasters in recent decades was mitigated by private insurance, federal disaster funding and stimulus to the economy driven by the recovery, such as construction and repair work,” Fitch states. “Fitch recognizes that future natural disasters may be more severe than those experienced over the past 30 years, potentially resulting in a longer, and more significant, impact on borrower mortgage performance.”

Fitch also covered Commercial Mortgage Backed Securities (CMBS). Unlike residential properties, commercial properties do not typically include earthquakes in their insurance coverage. According to Fitch, CMBS exposure in Southern California consists of approximately $34 billion on 2,377 properties, but no negative rating actions are expected for Fitch-rated CMBS with exposure to properties in the region, given servicer advancing, insurance coverage typically required of CMBS loans and strong sponsorship among the larger affected properties. Fitch ratings expects to receive Significant Insurance Event Reports from CMBS master servicers within two to three weeks of events.