LITTLE ROCK — Mortgage bond investors can see the bright side of the fires that destroyed about 1,800 houses in California this week: Insurance will probably cover loans that might have gone into default.
Loans that are backed by houses in the wildfire areas are a tiny amount - about 1 percent - of more than 700 mortgage-bond deals. But that is some consolation to holdersof mortgage loans "bundled," securitized and sold as bonds.
Lenders are usually protected against losses from fire by the homeowners' insurance required to get a mortgage. For bondholders, it's better to have a property burn to the ground rather than be occupied by a deadbeat, said Mark Adelson at Adelson & Jacob Consulting LLC in New York.
"Some of those thousands of families who lost their homeswould have defaulted," said Adelson, a former bond analyst at Nomura Holdings Inc. "Those loans are probably not going to default now because they're going to be paid out by insurance. It moves the loss away from the deal and into the hands of the insurance company."
Some homeowners may find rebuilding frustrated by insurers, who can offer to pay just 30 percent to 60 percent of the cost of rebuilding a damaged home - even when carriers assure homeowners they're fully covered, thousands of complaints withstate insurance departments and civil court cases show.
The wildfires may cost insurers between $900 million and $1.6 billion, according to Risk Management Solutions Inc., a consultant to the industry.
Bloomberg's analysis covered mortgages from ZIP codes listed on the United States Postal Service's Web site as being affected by the wildfires as of Wednesday. The analysis only looked at loans underlying securities without guarantees from governmentlinked entities such as Fannie Mae, and didn't include information on whether the homes were actually destroyed or damaged.
GMAC LLC, the Detroit-based lender, said Thursday that it wouldoffer mortgage relief counseling and other assistance to 330,000 customers that may have been affected. It will also dispatch a group of customer-service specialists to meet with homeowners.
Katrina's effect on home lenders was complicated because some water damage wasn't covered by insurance and not all homeowners had flood insurance, Adelson said. Earthquake damage is also generally excluded by homeowner policies, he said.
The most exposed mortgagebond deal is one from 2001 by Calabasas, Calif.-based Countrywide Financial Corp. that's 99 percent paid down and backed by adjustable-rate mortgages.
Business, Pages 37, 42 on 10/27/2007