Hurricane Sandy’s Impact on RMBS May Be Smaller than Expected

While the lives of those affected by Hurricane Sandy may not return to normal for some time, one research report suggests the storm's impact on non-agency residential mortgage-backed securities (RMBS) may be much less substantial than originally anticipated.

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With some estimates as high as $88 billion, ""Opera Solutions,"":http://www.operasolutions.com/ a New York-based company that specializes in machine learning, released its own estimate based on neighborhood-level data Friday. The firm suggests the damage will be closer to $6 billion.

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""For most bonds in the non-agency universe, the impact will be negligible as insurance and government assistance programs will mitigate much of the potential losses,"" Opera Solutions stated.

To predict the future impact of Hurricane Sandy on RMBS, Opera Solutions compared the physical damage to that of Hurricane Katrina, which severely damaged the Louisiana coast in 2005. Both storms resulted in significant flood damage.

After Hurricane Katrina, the impacted areas experienced heightened levels of delinquencies for about two years. However, prepayments also spiked at the time due to insurance payouts and government disaster relief.

It is also notable that the increase in foreclosures after Hurricane Katrina was concurrent with the start of the foreclosure crisis, and it is difficult to determine the level of impact of each cause.

Regardless, ""[b]ased on a detailed analysis of each portion of affected ZIP codes, the ultimate exposure is much lower than originally estimated,"" said Bill Hunt, head of research at Opera Solutions, regarding Sandy's impact.

While Opera Solutions expects the overall impact on the RMBS market to be small than previously anticipated, the study did find some bonds that could experience losses as high as 500 basis points.