How hurricanes, floods and tornadoes impact mortgages

What a destructive hurricane season means for the mortgage industry

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Climate change has caused an increase in extreme weather, including catastrophic storms and drought, to significantly impact the housing industry. According to preliminary estimates from CoreLogic, total insured wind and storm surge losses resulting from Hurricane Beryl's landfall in Texas will be between $700 million and $1.5 billion.

Hurricane season is not expected to soften from here. The National Oceanic and Atmospheric Administration has predicted an active hurricane season with an estimated potential combined reconstruction cost for 2024 storms of $10.8 trillion. The number of properties graded at a very high or even greater risk was slightly under 15 million, with the reconstruction cost projected to be $4.2 trillion; the subset of properties at extreme risk consisted of 6.4 million homes with a replacement cost of $1.7 trillion.

Approximately 7.7 million of these homes have an additional exposure to storm surge because of their location near the Atlantic Ocean coast, with potential replacement cost of $2.3 trillion.

Depending on the state, property owners may or may not be covered by their homeowners' insurance policy for wind damage. However, that policy does not cover water damage from storm surge. That is only covered by flood insurance, which is only required on properties in zones mapped by the Federal Emergency Management Agency and optional elsewhere.

"Insurance remains one of the most important tools for a resilient society, given the role it plays in recovery," Maiclaire Bolton Smith, CoreLogic's vice president of hazard and risk management, said in a press release. "With the potential for an active hurricane season on the horizon, insurers and homeowners should do everything they can to prepare and mitigate as much risk as possible."

Due to the extreme weather conditions, experts believe the mortgage market needs to start treating homeowners insurance like it does a one-year adjustable mortgage.

As with an ARM portfolio, the next step for lenders is to look at their portfolio and find the ways to mitigate risk, including understanding what the peril is and knowing what the related financial impact is.

"I think the challenge to the industry and inclusive of the insurance part of that industry is to come up with different solutions," George Gallagher, senior leader and principal of climate risk at CoreLogic, said at the Mortgage Bankers Association's Secondary and Capital Markets Conference in May. "How about a five-year policy where maybe there's a little buydown at the front end of it? How about something more oriented towards homes and communities that have resiliency built into it?"

What climate risk means in general for pricing loans and mortgage servicing rights can depend on whether you are looking at the loan-to-value ratio or if it is debt service coverage ratio loan, Kingsley Greenland, director, mortgage risk analytics at Verisk recently told National Mortgage News' Brad Finkelstein. If it is the LTV and one wants to measure the stress scenario, take the loss estimate generated from the catastrophe model being used and the lender should assume this is the new LTV. "Then you slice and dice your borrowers based on the metrics that you're all familiar with," Greenland explained.

For DCSR loans, "whether it's residential or commercial, you can look at who is on the margin in terms of performance stress and say, 'Well, how much of an increase in insurance premium can they handle before it's going to cause a performance issue?'" he continued.

Read more about how the mortgage industry is responding to an increase in extreme weather events.

Hurricane property damage estimated to be $11T in 2024

Approximately 32.7 million residential properties with a reconstruction value of under $11 trillion are at risk for some form of hurricane damage in the upcoming season, according to CoreLogic.

For this current hurricane season, which began on June 1, the National Oceanic and Atmospheric Administration is predicting between 17 to 25 named storms, with eight to 13 rising to the level of hurricanes, including four to seven being categorized as major hurricanes. NOAA rates 2024 of having an 85% chance of being an above-normal season for storm activity.

"Insurance remains one of the most important tools for a resilient society, given the role it plays in recovery," said Maiclaire Bolton Smith, CoreLogic's vice president, hazard and risk management, in a press release. "With the potential for an active hurricane season on the horizon, insurers and homeowners should do everything they can to prepare and mitigate as much risk as possible."

Read more:

Hurricane risk will affect $11T of properties in 2024

Home insurance is like a 1-year ARM with climate risks

The mortgage market needs to start treating homeowners insurance like it does a one-year adjustable mortgage due to climate-related issues, according to George Gallagher, senior leader and principal of climate risk at CoreLogic. While speaking at the Mortgage Bankers Association's Secondary and Capital Markets Conference in New York in May. (Gallagher noted he was quoting Jeremy Switzer, the chief credit officer at Pennymac, for that comment.)

The similarities between the two, Gallagher explained, start with the typical ARM loan having an adjustment cap. In some states, like California, there's a cap on how much insurance premiums can increase in a year. In those other states, it's like an ARM without a cap.

"So when you overlay that with losses from recent weather events, natural catastrophe events and the potential of losses for climate change, you really are starting to equate insurance as a one-year ARM," Gallagher said.

Read more:

Treat home insurance costs like a 1-year ARM, climate risk experts say

Former Ginnie Mae leader expresses concern on climate threats

Ted Tozer, former Ginnie Mae leader and housing strategist, has been outspoken on mortgage issues since he left his post in 2017, recently voicing many concerns about the threats that warming temperatures and more severe weather pose to lenders, servicers, property insurers and borrowers at the Americatalyst conference in Washington, D.C., in April.

"The most obvious thing happening right now is the incredible increases in homeowner's insurance. That's happening from the severity of incidents that are occurring," Tozer said in an interview with National Mortgage News' Andrew Martinez when asked about the ways climate change is impacting the housing market.

Read more:

Ted Tozer: climate change will drive g-fees, repurchases up

Mortgage servicing needs to do more to account for climate threats

Mortgage servicing rights holders are "nowhere near" accounting for climate threats, Seth Sprague, director of mortgage banking consulting services at Richey May, said at the Americatalyst "Going to Extremes" event in Washington, D.C., in April, highlighting the numerous risks to a servicer's portfolio.

Amid panelists' wide-ranging discussion of climate pricing risks, the Richey May leader continued to shed light on risks to servicers, such as losses from forbearance and their payment obligations to bondholders.

"Servicing is [the] sweeper at the end of a parade," said Sprague. "It is their job to clean this up and the harder you make it for servicers, the less they'll pay for servicing, which has a direct impact on affordability and housing."

Read more:

How climate change can disrupt secondary market pricing

How mortgage professionals think about climate change today

Additional panelists at AmeriCatalyst's "Going to Extremes" conference said the impact of extreme weather on the housing market has started to weigh on independent mortgage bankers, but the issue for now is "manageable."

"Five years ago when we would bring a group of lenders together, climate wasn't really a concern… but this year if you get a group of lenders together [climate risk] always comes up," Mike Fratantoni, chief economist at the Mortgage Bankers Association, said. "That said, I wouldn't characterize it as a crisis. I still think it's manageable, but definitely a top concern."

Out of all extreme weather patterns, almost all of the six panelists expressed worry over how drought may impact the housing market.

"We need to talk a lot more about places that don't have enough water, about drought risk," Sam Khater, chief economist at Freddie Mac said during the panel discussion. "Some of the climate research suggests this is the biggest danger because that influences productivity and fertility of the land."

Read more:

Climate risk? "Urgent but manageable" industry stakeholders say