Weather weighs on insurance and mortgage decisions

Lew Sichelman

The cost of home insurance is on the rise, and not just because property values ​​rose — by nearly 20% across the board — during last year’s home-buying spree.

Right now, no one knows how high insurance costs can go. But the Federal Emergency Management Agency is now operating under a new flood insurance rate structure that changes the way it views risk.

Additionally, the increasing number of natural disasters is forcing insurers to reassess their risk, which almost certainly results in higher premiums. The weather is even starting to inform lending decisions, with the distinct possibility that lenders will charge more for loans in high-risk areas – or not write them at all.

Weather events are always a threat. But in the first nine months of last year alone, national environmental information centers counted a record 18 major storms, each with losses exceeding $1 billion.

FEMA raises bounties

To bolster its balance sheet, FEMA, which oversees the national flood insurance program, shifted gears. Instead of assessing risk solely based on whether a home is located in a flood zone or not, the new formula looks at a variety of factors, including distance to a flood source, severity and frequency. flooding and property characteristics such as cost of reconstruction. the property in case of damage.

The result: Some 3.3 million homeowners who currently have coverage will pay more, according to research from Porch, a provider of software and services to several home service industries.

The typical NFIP premium is $734 per year. FEMA predicts that 77% of people with flood insurance will see their price go up — up about $88 a year for most, Porch calculates, but some as much as $240 a year — the others benefit from a lower premium. For those hardest hit, the increase will be spread over a few years.

Floods are not covered by home insurance, but the costs of these policies are also increasing.

“The growing number of weather events has left the insurance industry reeling,” said Jennifer Rasmussen, author of a new white paper detailing what’s in store for policyholders and vice president of real estate software company SitusAMC. . “As the intensity and extent of future catastrophes increase, insurance rates for homeowners will likely increase significantly.”

Not just coastal flooding

According to LexisNexis, 39% of all home insurance claims in 2020 were due to catastrophic weather. And the SitusAMC document said the increase in the number of severe hurricanes, wildfires, tornadoes and other weather events related to climate change has created significant risk for insurance companies.

The impact is not limited to the coasts either. Winter storms in Texas, for example, accounted for 40% of total property losses for insurers in the first half of 2021. And the nonprofit Climate Central said the Lone Star state, not California , had the highest wildfire threat level, with 72% of the state’s population at risk.

Of course, recent demographic and migration trends compound the problem as more and more people move to areas prone to flooding and fire. According to data from the First Street Foundation, an additional 1.2 million homes are at risk of flooding over the next 30 years.

All of this is straining the mortgage industry as companies decide what to insure and at what cost. Some lenders have already started incorporating climate data from ATTOM Data Solutions into their decision-making scenarios, said the firm’s Todd Teta. And we can expect others to do so.

Forecasts deemed insufficient

A report by the Mortgage Bankers Association’s research arm said lenders “will not be spared” the ravages of climate change. The physical destruction caused by extreme weather events “will influence the behavior” of lenders, investors and government-backed loan programs, he said.

The report says bad weather could lead to more mortgage defaults, which would put increasing pressure on the sophisticated system of allocating housing finance and housing risks among multiple stakeholders, including consumers, builders homeowners, appraisers, originators and mortgage investors.

MBA officials say there have been high-level discussions in the industry about incorporating weather-related risks into underwriting decisions. But chief economist Mike Fratantoni said while regional climate models offer enough data, ownership-level decisions don’t.

“There just isn’t enough information to make the call,” he said.

Meanwhile, the Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac and the Federal Home Loan Banks, has asked these key entities to designate climate change as a priority concern and actively consider its effects in their decisions. of purchase.

Eventually, lenders might charge a higher rate for a loan on a higher risk property. They might demand a bigger down payment or a larger home insurance policy – ​​maybe even some sort of disaster insurance policy. Or they may simply not grant the loan at all.

Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing industry and housing finance publications. Readers can contact him at [email protected]

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