Anecdotes abound after natural disasters displace businesses.
After Hurricane Sandy walloped the East Coast, there was talk of mortgage bond traders, unable to enter Lower Manhattan in the days after the storm, conducting trades from McDonalds and Starbucks.
It’s amusing to think of those bond professionals buying and selling agency debt with screaming kids running around. There are even potential parallels to draw between the two. But, more importantly, is the fact that the markets closed briefly in the wake of the storm. After the terrorist attacks on Sept. 11, 2001, financial markets were supposed to withstand catastrophic events. Buffers were created, firewalls safeguarded. In no way were the markets meant to collapse again.
Housing professionals learned a lot from the aftermath of Superstorm Sandy. It also served as a painful reminder there are still aspects of mortgage finance and real estate very vulnerable to unexpected disasters.
However, the biggest shock to the system didn’t come in the form of rumors of the stock exchange floor flooding, or any of the other misinformed press coverage during the storm itself. The shock came in the days that followed, those days of traders working remotely.
One co-owner of a medium-sized investment bank, who didn’t want to be named for fear it would reflect poorly on his firm, said the technology put in place actually worked very well. Deals could, after all, get done to some extent at McDonald’s WiFi hotspots.
So to that extent, Sandy showed the financial world that its technology works just fine. It’s the people who can’t withstand the disasters.
"You can’t trade over-the-counter derivatives with JPMorgan if no one is working at JPMorgan, and those who are available are in the middle of mass evacuations and lack the mental capital to make trade decisions effectively," said the aforementioned co-owner. "It used to be, you worried about putting a storage database in Singapore, because what if Singapore falls into the wrong hands? Now you worry how traumatized your personnel will be after the storm, and whether they will be able to effectively return to work."
Ron D’Vari of New Oak Capital agrees with the sentiment — to a degree. After all, D’Vari points out the New York City real estate is trades at a premium, so most companies won’t pay to store their technologies there when similar services are so much cheaper in other areas of the nation. However, considering the East Coast failure of the Amazon server, a popular data processing service among Wall Street firms, D’Vari said Sandy highlighted weaknesses in both people and property.
"It all comes down to confidence in the robustness of the disaster recovery plans,” D’Vari explains. “One of the areas that was not addressed realistically in the business continuity plan was that key personnel availability and operability."
D’Vari agreed one of the key issues for a highly concentrated financial center like New York is the geographical concentration of human resources and decisionmakers.
"It is hard to assess if key personnel will be available due to their home being affected and their family being stranded," D’Vari said. "And it is another thing to test out the backup systems and make sure they work, albeit at a lower capacity. It requires a much deeper planning and business process management if you have to assume certain unknown personnel are not reachable."
COST IMPLICATIONS
The full extent of the damage caused by Hurricane Sandy is still uncertain, but initial estimates of $20 billion have already been blown out of the picture; those numbers look increasingly likely to come in at $40 billion to $50 billion, with the insured losses less than half of that total. Housing and mortgage markets took hits as well, though to very different degrees.
So far early indicators show that the damage and destruction left in the wake of Hurricane Sandy is likely to only impact coastal properties. In the short-term, market analysts said to expect a surge in delinquencies in mortgage loans that could push already troubled pockets of housing further into foreclosure territory.
Mortgage technology and mortgage analytics provider CoreLogic said that, according to its storm-surge analysis that is based on the projected path of Hurricane Sandy, nearly 284,000 Mid-Atlantic homes valued at roughly $87 billion were at risk of property damage from the hurricane. The estimate, however, measures only damage from storm surge and does not include potential damage from wind and rain associated with hurricanes. After the storm, CoreLogic said it believes that its prediction was accurate.
Further vulnerabilities to another storm are not yet quantifiable, however. For example, in September 2005, Hurricane Rita further impacted damage from the costly Hurricane Katrina in August 2005. In this case, the good news is Sandy appears to be an isolated event.
Based on CoreLogic’s breakdown, at least 81,000 properties valued at $35.1 billion are at risk in New York State. In New Jersey, more than 75,000 properties valued at roughly $22.6 billion are in danger.
“Even though we are able to narrow our estimates of properties at risk, the number and value are an indication of all properties that were at risk in the area covered by the center of the storm,” said Tom Jeffery, senior hazard scientist for CoreLogic spatial solutions. “We chose this narrower area based on the geography that experienced the highest surge levels. It extends from northern New Jersey up through Long Island.” Jeffrey added that Hurricane Irene, which hit the U.S. East Coast in August 2011, generated a maximum of about 4.5 feet of surge in some parts of this area. Sandy doubled that in many areas and nearly tripled it in a few. The highest surge values that have been reported are about 12 to 13 feet.
“What that tells me is that the surge water was able to move much farther inland and affect not only properties farther from the coast but also homes built on higher ground, doing much more damage than Irene,” he said.
PROTECTING CITIES
Jeffery recommends changes be adapted in order to protect entire cities from flash flooding in the future. There are however, some obstacles to any of this happening, he told HousingWire.
He said that protection from a hurricane-driven storm surge is possible in one of two ways. The first is to refrain from building new structures or infrastructure in the area potentially affected by future storms. However, removing existing structures from high-impact areas altogether is unlikely, given the necessity of structures and infrastructure along U.S. coastal areas and the fact that some areas are irreversibly densely populated. So, another option is to construct protective barriers between the surge and the structures and the city’s infrastructure. This is what has been done in and around the New Orleans area after Hurricane Katrina.
“Many other coastal cities do not have any mitigation devices — walls, berms, levees, pumping stations — while some cities may have a few, but nowhere near the extent of those found in New Orleans,” Jeffery said.
The problem with this solution, of course, is the cost. The updates to the mitigation structures in Louisiana since Katrina cost billions, though they were deemed as quite successful in the aftermath of Hurricane Isaac, Jeffery said.
“It is unlikely that the billions necessary to provide this level of protection to other coastal cities will be available in the near future. So for protection, in lieu of that option, the only real alternative is to first determine where the potential risk is located (for future events) and then do whatever on-the-ground mitigation is possible,” he said.
In some cases that may involve plans for targeting higher risk areas for evacuation as early as possible. In addition, utility companies will likely be able to prepare for service outages by knowing the higher risk areas and possibly develop technology to reduce the risk to loss of power, water and sewer service in these areas.
“I don’t know of specific plans to implement new technology for future storms, but since Hurricane Sandy demonstrated the need for some improvement in these areas, I have no doubt these companies are considering solutions,” Jeffery said.
MORTGAGE IMPACT
Citigroup, in a Nov. 6 report, calculated that about 48,500 mortgage loans with about $16.3 billion in unpaid principal balance correspond to ZIP codes that fall in the path of Hurricane Sandy.
The majority of the loans are in the subprime and Alt-A sectors.
Credit Suisse said that the ZIP codes affected represent about 3.5% of all outstanding first-lien private label RMBS. The level of exposure for each individual sector and vintage varies somewhat – with subprime having the highest concentration at 3.9% and Prime, Alt-A and Option ARMs at 3.5%, 3.6% and 2.5% respectively. Among legacy RMBS, 2007 vintage deals have the highest level of exposure to these coastline ZIP codes — at 4%, 4.3%, 2.4% and 4.2% for Prime, Alt-A, Option ARMs and Subprime, respectively.
“We expect delinquencies to increase in the near term as borrowers divert cash flow to make essential repairs,” said Credit Suisse analysts in the report. “The longer-term effects of Sandy are largely dependent on the level of insurance coverage on the property and the financial health of the borrower.”
The New York Federal Reserve hosted a webinar on Nov. 29 discussing the impact the storm may have on the mortgage market. The Fed estimated that around 4% of the housing stock, or upward of 300,000 homes in New York have been damaged or destroyed by Sandy. In New Jersey the number falls to around 70,000 homes or 2% of the housing stock.
FORECLOSURE SPIKE?
One concern is that many of the hardest hit places in the region, such as Northern New Jersey, parts of the Hudson Valley and Long Island; could experience a large and growing backlog of foreclosures. “It’s important to recognize that housing conditions in the region’s most depressed markets remain sluggish,” said the New York Federal Reserve. “In addition, owing in large part to the long foreclosure process in New York and New Jersey, our region faces a large and growing backlog of foreclosures.”
To be sure, RealtyTrac said in its October foreclosure report that foreclosure filings rose in New Jersey, New York and Connecticut in the month before Hurricane Sandy is taken into account. In New Jersey, numbers were up 140% from a year earlier; in New York filings were up 123%. And in Connecticut filings were up 41% —marking the biggest annual gains among U.S. states in October.
The government-sponsored enterprises also took action in regard to Sandy’s aftermath. For example, Freddie Mac authorized servicers to suspend foreclosure proceedings for up to 12 months on mortgages it owns or guarantees in states affected by the storm.
The McLean, Virginia-based company said it will permit some on-time borrowers to defer mortgage payments for up to a year, will waive the assessment of late fees against borrowers with storm-damaged homes and will not report delinquencies caused by the disaster to credit bureaus.
Eqecat Inc., a provider of catastrophic-risk models, calculated that insured damages may be as much as $20 billion. “Sandy was an extraordinary storm. The scope, how many houses were affected, and the type of flooding is extreme. Sandy could reach total damage levels of Hurricane Andrew. It depends on how fast we are able to restore operations.”
Residences accounted for about 55% of the insured real estate damaged by Sandy, according to Eqecat, which estimated total economic losses of as much as $50 billion. If so, that’s about half the estimated damage caused by Katrina.
About 34% of the property losses occurred in New York, 30% in New Jersey, 20% in Pennsylvania and the remainder in other states, Eqecat said Nov. 1.
Citi analysts said that subprime borrowers are most likely to default as they are on weaker financial footing initially and are also most likely to have worse insurance coverage.
But the analysts note the already high level of delinquencies among the loans in the affected areas. About 39% of the loans from the exposed areas are already more than 60 days’ delinquent. Among subprime borrowers, who are likely to be more prone to default as a result of economic hardships, this level reaches north of 50%. “If we assume that the majority of these delinquent loans were likely to get liquidated eventually anyway, the net negative impact from the storm will be dampened,” said the analysts in the report.
A BLOW TO RECOVERY
Another concern is that the storm may undo some of the encouraging signs that the region’s housing markets experienced in 2012. According to the Fed, the storm adds a “significant challenge” to broadening and sustaining the recovery that’s under way.
Lawrence Yun, chief economist of the National Association of Realtors, said that the storm would definitely create a negative in the short term. “The bottom line is we clearly anticipate a slowdown, but it will be temporary,” he said.
Yun cited the already lagging pending home sales in the region as a result of sellers who will take damaged properties off the market and buyers who will hold off making purchases. The pending home sales index in the Northeast, said Yun, slipped 0.1% to 79.2% in October but is still 13.3% above a year ago.
New Oak’s D’Vari concurred. “While in the short term Hurricane Sandy will impact housing and CRE credit negatively, the post hurricane reconstruction activities in the Northeast is expected to add to the overall GDP growth,” he said.
Larry Kay, on the U.S. CMBS team at Standard & Poor’s said, at a press briefing following the storm, that based on information provided by mortgage servicers, early indications were that the damage had been limited. Although damage on many properties are still in the early stages of assessment. Kay said that at least one servicer who had received broad responses from about half of its service loan portfolio, identified in the path of Sandy, reported limited to no damage. “While there was collateral damage in several cases it was reported that it consisted of minor roof and window leaks due to the rain and high wind,” he said.
However, Kay noted that even with just minimal damage, S&P still expected tenant rent payments to be delinquent for those business that were affected. For properties that have already experienced weak financial performance this event could be the trigger that puts them into default.
Borrowers may also opt to postpone making debt service payments until insurance claims are processed. As a result, S&P anticipated a spike in delinquencies and an increase of properties transferred to special servicers over the next few months. “In the short-term, bondholders won’t be affected by this surge in delinquencies because servicers are likely to continue advancing principal in interest payments as long as they deem the advances to be recoverable,” he said.
Fitch Ratings did a walking tour of the downtown Manhattan area, where several affected CMBS properties are located. Properties such as 315 Hudson and the Mercer Hotel showed no visible damage, with business operating as normal. Other properties seemingly at business-as-usual, according to Fitch, include Seven World Trade Center and One Liberty Plaza.
However, One New York Plaza and 100 Wall St., underwent repairs. Fitch said it planned to also visit certain properties in other areas affected by the storm such as other boroughs and New Jersey and will update the market on potential inlays to CMBS containing these properties as collateral.
