Housing Bubble
Fitch: Home mortgage industry largely insulated from war's impact
NEW YORK--(BUSINESS WIRE)--March 21, 2003--The residential mortgage-backed securities (RMBS) market is well protected from the economic concerns that could be exacerbated by the war in Iraq, according to Fitch Ratings. The geographic diversity and credit enhancement structured into RMBS deals should adequately address the economic impacts of the war and the possibility of terrorism. However, the war will push some borrowers, already teetering on the edge of default as a result of the pre-war economic malaise, over the edge.
Fitch notes that any war-related impact on the overall economy will be area and industry specific. The economy will suffer slightly from the war, mostly in reduced travel and tourism. This will impact certain geographic areas more than others. For instance, it will likely impact Orlando, an area driven by tourism, more than other cities.
Terrorism issues are as before: very low frequency and high severity -- as it relates to localized physical disturbance. Based on experience of the effect of Sept. 11 on RMBS pools, Fitch expects any effect would be very limited. This effect is limited as long as a pool is reasonably geographically diverse and/or the borrowers are not dependent on a few limited localized industries (or localized military bases).
The Soldiers' & Sailors' Civil Relief Act of 1940 allows a borrower on active duty to reduce, or in certain cases eliminate, payments on his or her mortgage during active duty. Even though the result of these reduced payments on RMBS will be greater than in peacetime, the outcome is anticipated to be negligible. This is due to the small number of active military personnel (tens of thousands) relative to the number of borrowers in all the mortgage pools (millions of borrowers). This is consistent with the experience during the Gulf War (although obviously higher than in non-war periods).
The economy, absent any war concerns, is barely moving along today -- struggling to avoid a 'double dip' recession. There are a few borrowers who are both teetering economically and who will be additionally adversely affected by the war. However, they only make up, on average, a small portion of total borrowers -- a tiny percent in the prime transactions and a somewhat larger portion of subprime transactions.
As previously stated by Fitch, there does not appear to be a national housing bubble, only certain local overheated markets. The war would only exacerbate such localized concerns if one region was subject to terrorism issues, as indicated above, or contained an extremely high percentage of active military personnel, or experienced a particularly acute economic dislocation due to the war.
Source: Fitch Ratings
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