Mortgage

The Influence of Hurricane Season on Mortgages and the General Financial system

A sunken street sign on a flooded street after Hurricane Ida in Laplace, Louisiana, USA, on Thursday, September 2, 2021. The New Orleans utility company restored electricity to a small part of the city after Hurricane Ida hit the area had devastated the network. Photographer: Eva Marie Uzcategui / Bloomberg

Eva Marie Uzcategui / Bloomberg

Last month, Hurricane Ida caused devastating flooding in the United States. Even more worrying, it affects several states that do not normally face this type of environmental threat (northeast states such as New York and New Jersey).

The worst flooding struck traditional floodplains in Louisiana, now the first state to record a hurricane with winds of 150 miles an hour or more for two consecutive years. If hurricanes become more common in previously safe states, how will this affect home prices, mortgage performance, and insurance?

According to research on "Hurricanes and Residential Mortgage Loan Performance," hurricanes significantly increase not only the probability of default but also the net severity, both of which are determinants of credit loss. This can be made worse when access to government disaster relief is limited. The same research shows that hurricanes are becoming more damaging and that the frequency of the most destructive hurricanes has increased.

Hurricanes could affect the stability of banks that provide home loans. Let's take a closer look at what trends are emerging and what can be done to protect future investments.

The consequences for buyers and sellers
Hurricanes damage property, disrupt economic and social activities, and increase mortgage loan defaults and credit losses, which can be costly to homeowners and the economy. For example, mortgage foreclosures in New Orleans increased dramatically after Hurricane Katrina.

Most people in the US choose to include their insurance and taxes in their mortgage payments. For example, let's say someone has been approved to buy a home for $ 2,000 a month. In the context of new floodplains, it's perfectly plausible that insurance would go from $ 100 per month to $ 250 per month. The buyer suddenly has significantly less purchasing power.

Hurricanes massively delay all processes – expensive repairs and back and forth with insurance can take months. It would be catastrophic if this scenario happened regularly in many other regions.

Also, if someone tries to sell a home, the lockdown fee may expire before the person can sell. There are signs that prices will only continue to rise before hurricane season, the most popular time to sell in New Orleans, and will plummet more sharply in the months after the end of August and September.

What is the overall market effect?
Mortgage performance in an area where flooding and hurricane damage is prevalent will deteriorate. If you look at the current situation in New York, many basement apartments have been ruined by floods without flood insurance to protect them. Unfortunately, if the cost of repairing one of these homes is tens of thousands of dollars, many people will be giving up on these mortgages.

President Biden even admitted that insurance companies need to show humanity, saying, "Don't hide behind the fine print and tech." But will insurance, realistically, always be fair? For a one-off freak event, maybe, but not if it happens regularly. To avoid a crisis similar to 2008, the mortgage industry needs to be protected. Flood insurance will soon have to be standard for almost all coastal areas, which is associated with considerable costs.

We need more awareness and updated flood maps
More than a third of states have no legal or regulatory requirements that require a seller to disclose a property's flood risk or past flood damage to a prospective buyer. However, as a buyer or lender, you should have access to such information in order to properly calculate risk. And if previous owners had flood insurance through the National Flood Insurance Program (NFIP), the Federal Emergency Management Agency (FEMA) would have a record of past floods that it could share as well.

According to an analysis by Climate Central, the number of affordable housing units in the United States at risk of periodic flooding is projected to triple as sea levels rise by 2050.

However, since the early 1970s, FEMA has not made extensive changes to the standards for building and land use in flood-prone areas. Even since a congressional mandate requiring FEMA to include future conditions from updated flood maps, these conditions are still unknown, meaning communities make decisions without considering future climate changes.

Hurricanes won't magically stop. If anything, they are becoming more common. By raising awareness of flood insurance, disasters can be prevented economically. In addition, insurance companies will be forced to offer more flood insurance if information on floodplain areas continues to be updated.

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