L.A. fire issues loom as Southeast disaster damage ebbs

Wildfires in the Los Angeles region are about to put more upward pressure on forbearance numbers just as they were starting to fall for the first time in months.

The level of forbearance in the mortgage market fell for the first time since May due to the falloff in assistance necessary for borrowers hit by hurricanes in the Southeast last year, slipping below the psychologically important 50 basis-point level to 47%.

The decrease gives servicers a respite and some bandwidth ahead of a new surge in forbearance, and points to the potential speed at which the industry can manage disasters that account for a high share of this type of borrower relief using its current ruleset.

"At year end, almost 43% of borrowers in forbearance were there due to a natural disaster. Given the disruption and devastation caused by the California wildfires, that share will likely move higher," said Marina Walsh, vice president of industry analysis at the MBA, in a press release.

That share was down from closer to 50%, or 46%, in November because of the decline in assistance to borrowers hit by storms like Hurricanes Helene and Milton, which hit the Southeast in late September and early October, respectively.

How the damage and recovery from the Southern California conflagrations compares to that of the hurricanes remains to be seen, but historically spending on fires tends to be higher, according to a recent report by the Carnegie Endowment for National Peace.

Historically, hurricanes cost more than fires, which are typically rural. But a recent Carnegie Endowment for International Peace study indicated that "hurricane-strength fires in dense, urban areas are a game-changer" in that the damage is more comparable.

The L.A. area fires destroyed an estimated 10,000 homes and damaged 62,000, according to an analysis of third-party nonprofit data in the report by Sarah Labowitz, a nonresidential scholar, and Debbra Goh, a junior fellow. In comparison, Hurricane Helene caused damage that was "major" to 41,000 homes in Florida. Another 3,312 houses sustained "severe" damage.

The latest Redfin estimate available at deadline suggests the number of homes destroyed by the particularly severe Palisades and Altadena/Pasadena area fires has risen  even more since Carnegie's Jan. 10 report. The Jan. 22 update shows these fires destroyed 12,941 homes.

Servicer rules for dealing with distressed borrowers and the amount of assistance available to homeowners impacted by the fires will continue to evolve with a Republican-dominated administration and Congress this year. 

President Trump has visited areas hit by the hurricanes on Friday and a subsequent visit to the L.A. area for a look at the fire damage, but has indicated the former is more of priority. He blames the California fires on Gov. Gavin Newsom, one of his political opponents, according to a Bloomberg report. 

"We're going to take care of Los Angeles. I'm going to North Carolina, which has been abandoned by the Democrats. And I'm going to North Carolina, very importantly, first," Bloomberg reported Trump saying on Tuesday at the White House.

Newsom announced Thursday that a 270 member group of servicers and lenders, credit unions, state chartered depositories and one federal bank have made commitments to offering property owners in fire areas assistance, adding to promises made previously by five lenders. 

Members of the group will offer at least 90 days of forbearance without taking adverse action that could impact borrowers' credit records and potentially other forms of relief.

While servicers involved in government-related mortgage markets have to follow certain protocols for distressed borrowers under current rules, those that make private loans often have more discretion.

"California will continue working with all stakeholders to support survivors, expedite recovery, and provide relief," Newsom said in a press release.