Climate change is accelerating the number and severity of climate-and weather-related disasters that will have far-reaching impacts on the housing finance industry. The stakes are high for mortgage lenders and servicers and the borrowers they serve, as these events threaten both purchase loan pipelines and servicing portfolios. When disaster strikes, could data hold the key to a more fluid industry response?
DISASTERS ARE HERE TO STAY
According to a National Oceanic and Atmospheric Administration (NOAA) report, the United States bore 20 distinct billion-dollar-plus climate and weather events in 2021, making it the third-most-costly year on record with an estimated $145 billion in damages. In December, a multistate thunderstorm unleashed tornadoes that carved a 200-mile path of destruction across Kentucky, leveling the homes of more than 1,000 families. In the fall, Hurricane Ida pummeled homes in the Gulf states, where it made landfall before inundating the Northeast with severe rain and flooding. And throughout the year, 8,619 wildfires across the state of California charred over 2.5 million acres of land and reduced thousands of structures to ash.
An examination of data from the last four decades shows that these disasters have become more frequent and costly over time due to increased exposure (more property to damage), increased vulnerability (more properties being exposed to conditions they were not built to withstand), and climate change. Even when adjusted for inflation, damages incurred in the last five years account for a third of the $2.155 trillion total in disaster damages since 1980.
Projections indicate problems will continue to grow. An analysis developed by the Risky Business Project—an organization focused on quantifying the economic risks of our changing climate—estimates that by 2050, between $66 billion and $140 billion in real estate will be below sea level. A report from the Mortgage Bankers Association adds expectations of increasingly devastating storms, excessive heat and wildfires, drought, and more.
To the mortgage industry, these numbers are more than mere abstractions, as structural damage to buildings and homes makes up the lion’s share of losses caused by climate and weather disasters. When flooding, wildfires, and other events wreak havoc on properties and upend lives, pending home purchases get derailed and homeowners default on mortgage loans, creating what Housing Finance Agency (FHFA) Acting Director Sandra L. Thompson describes as “a serious threat to the U.S. housing finance system.”
As the FHFA and its regulated entities juggle their need to reduce the liability of securitizing mortgage loans in disaster-prone regions with their charge to equitably meet the housing needs of communities, boots-on-the-ground mortgage lenders and servicers are left to manage the immediate fallout.