Lender stops issuing mortgages in certain Canadian flood zones

A Canadian lender has stopped issuing mortgages in certain flood zones, a move which echoes pullbacks by residential property insurers in the U.S. 

The Desjardins Group, a Quebec-based financial services firm, said it won't lend in zones with a one-in-20 chance of being flooded each year. It is also only allowing buyers of homes whose sellers have Desjardins mortgages to obtain new financing up to 65% for that property, and those properties must have flood mitigation features such as embankments. 

"The impacts of climate change, including water damage, are growing in importance and causing substantial damage," the company said in a statement this week. 

The lender added that properties in the designated zones are generally uninsurable, and less than 5% of homes in its mortgage portfolio are in the affected areas. Canada lacks a national flood insurance program like the NFIP in the U.S., although the government there is mulling a program. 

No stateside lender has publicly pulled out of a market because of climate risk, although flood insurance woes in the U.S. have affected originations. Congress has also yet to extend the NFIP, set to expire March 22; lawmakers appear poised to vote to extend government funding through September. 

The rising cost of residential property insurance meanwhile has strained some U.S. markets as American insurers respond to numerous pressures from climate risk, to restrictive laws on price hikes, and rampant litigation. 

Risk assessment experts who spoke to National Mortgage News offered differing opinions on whether U.S.-based lenders would make a move similar to Desjardins.

"I think it's naive to think that it cannot happen here," said Toni Moss, CEO of AmeriCatalyst, an industry advisory firm. "It's just a matter of time to go from, "We're not going to insure," to "We're not going to lend in these areas." 

Insurance providers including Allstate, Farmers and State Farm have wound down coverage in California and Florida, citing more expensive wildfire and hurricane responses exacerbated by inflation. Insured losses, according to AmeriCatalyst, were $63 billion in 2022 alone, or equivalent to $1 billion every three weeks. 

Kingsley Greenland, director of mortgage risk analytics at risk assessment firm Verisk, said it's unlikely a U.S.-based lender will make a move similar to Desjardins in the near future. He cited Canada's lack of national flood insurance and the country's lack of agency securitization akin to Fannie Mae and Freddie Mac to mitigate risk. 

Mortgage servicers could be more sensitive to climate impacts, he added, as mortgage servicing rights could have geographic preferences more granular than the underlying loans. 

"You can price it in ways that you couldn't for a 30-year fixed-rate mortgage or even a non-QM or a jumbo," said Greenland of MSRs. "So I can see that moving faster where servicers or lenders who have a choice to sell servicing start to develop a climate-related view faster than home loan originators."

Regulators also took another step Wednesday toward addressing climate risks, in enacting rules for public companies to beef up their climate-related disclosures to investors. The requirements, which the Securities and Exchange Commission weakened after pushback, require firms to disclose climate-related factors that can have material impacts on their operations. 

The Mortgage Bankers Association said it was pleased with the altered rules, and the longer implementation schedule for required registrants. Publicly traded lenders and servicers who've so far released annual reports only mention climate risks briefly under operational risk disclosures. Fannie and Freddie meanwhile elaborate on the impacts of climate change in their respective 10-K annual filings. 

Greenland lauded the government-sponsored enterprises' investments into measuring climate risk, and another effort by regulators in issuing principles for safe management of exposure to climate-related financial risks. The real estate industry is already incorporating tools such as geolocation technologies to help investors make decisions. 

"Catastrophe models are well-documented, well-validated by the insurance industry and offer a turnkey solution for mortgage bankers trying to understand their exposure to these low frequency high severity events," said Greenland.