Floods, wildfires and other types of extreme weather are threatening not only the real estate industry but also the mortgage industry.
Mortgage lenders are unprepared for widespread foreclosures as natural disasters increasingly hit areas where few borrowers have insured their properties against fire or flood damage, according to former Freddie Mac executive Ed Delgado.
Assessing credit risk is a fundamental function of the mortgage industry, but lenders lack an understanding of “weather risk and where those events can take place,” said Delgado, who now serves as CEO of Five Star Institute, a mortgage trade association.
After large-scale natural disasters, mortgage servicers usually suspend foreclosure actions temporarily and adopt loan-forbearance programs, which extend the terms of mortgage loans while allowing borrowers to avoid making a few monthly payments.
Forbearance and foreclosure suspensions are post-disaster guidelines for mortgage servicers from Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), which insure or own most home loans.
But the mortgage industry has failed to quantify the potential losses if a large number of borrowers abandon homes due to damage or destruction caused by a major natural disaster.
In August 2017, for example, Hurricane Harvey flooded nearly 100,000 homes in the Houston area, and 80 percent of them lacked flood insurance because their locations weren’t prone to flooding.
After the hurricane, severe mortgage delinquency among owners of damaged Houston-area homes soared more than 200 percent, CoreLogic reported.
The Houston area avoided widespread foreclosures after Harvey because investors paid cash to buy many of the homes of delinquent mortgage borrowers.
Attom Data Solutions reported that investor acquisitions of 10 or more properties rose almost 50 percent in the year after Harvey. The post-Harvey investors ranged from small-scale house flippers to such large-scale buyers as HomeVestors of America and Cerberus Capital.
But Delgado says Harvey’s impact on Houston should serve a warning to mortgage lenders in the rest of the nation, because many of the damaged homes in the Houston area were located outside of FEMA flood plains, so the owners were not required to have flood insurance.
Though mortgage lenders rely on FEMA flood maps to assess the flood risk of properties, FEMA administrators admit the maps fail to account for extreme weather.
FEMA is supposed to update its flood maps every five years. But some communities resist reporting flooding problems to FEMA to prevent their insurance premiums from rising, according to David Maurstad, deputy associate FEMA administrator for insurance and mitigation. [CNBC] – Mike Seemuth