Hurricane Florence caused between $38 billion and $50 billion in damage and economic losses, according to an article in The Wall Street Journal on Sept. 21. Within this estimate is damage to an estimated 391,000 homes with mortgages, including an estimated 283,000 homes in 18 North Carolina counties that FEMA has declared disaster areas, according to a Sept. 25 article by the Mortgage Bankers Association.
While the residential mortgage industry waits to see the resulting delinquencies and foreclosures in the coming months and over the long term, MountainView Financial Solutions, a Situs company, showed its clients how potential fallout from the hurricane will impact its independent valuation of mortgage servicing rights (MSR) for the region.
In emails to clients the week of Sept. 21, MountainView’s MSR valuation team shared a detailed protocol it expects to follow in adjusting its valuations. The process started with identifying ZIP codes within the affected counties and will soon – within weeks or months – move into a phase where mortgage servicers have assigned one of several possible dispositions to individual mortgages, based on property inspections. The possible dispositions include continued timely payments, temporary or extended forbearance, repayment plans, loan modifications, or defaults, and MountainView will document the assigned disposition at the property level as the servicer provides that information.
As MountainView thinks about modeling this impact to the value of the MSR asset, the first assumption change is an increased cost of servicing, due to the additional time mortgage servicers will be communicating with borrowers over the next three months.
The second change is to add an incident of default by taking an expected level of default and running it through a foreclosure pipeline for 12 months. MountainView has historically used a default rate of 10% of impacted properties.
The third change is to add in default severity, in terms of the servicer’s cost of a foreclosure loss or its unreimbursed payment advances to investors.
In thinking about these potential costs at the most severe extreme, where borrowers walk away from their homes and default on their mortgages, several nuances come into play, according to Mark Garland, Managing Director and Head of MSR Valuation at MountainView. These nuances include the type and level of property damage, wind vs. flood damage, and what type and level of property insurance was in place.
“With Hurricane Florence, we’re finding that there are really radically different levels of flood insurance between properties near rivers and properties on or near the coast,” said Garland. “Many people may be surprised that there’s actually more flood insurance in place near the rivers, and that’s the type of nuance or complication we need to think about in terms of the value determination for each MSR.”
While Garland said his team will start adjusting MSR values in October and November, he added that part of the complication in determining value is that this issue will take several months and potentially a few years to fully resolve.