How hurricanes, floods and tornadoes impact mortgages

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.”

Read more: How climate change impacts minority communities 

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: How climate risks are influencing home buyers today

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