The home insurance marketplace has been facing a reckoning. The challenges that higher costs place on carriers, regulators, lenders and consumers has been well documented this year, and the acceleration of extreme weather events has only made things worse.
The arrival of Hurricane Helene late last month threatens to exacerbate the situation in the states it struck. And it raises questions about how more of these events could impact the mortgage industry.
With the death toll from Helene crossing the grim milestone of 230 this week — and with thousands of impacted homes without flood insurance wiped away — this could lead to a ripple effect that drives homeowners insurance premiums even higher.
Helene slammed into areas across multiple states that conventional wisdom of years’ past would have been called safe from the impacts of extreme weather and climate change. Further challenges will be brought by Hurricane Milton, which is expected to have a sizable impact this week along the Gulf Coast.
Experts who spoke with HousingWire are concerned about further increases to insurance costs, which could threaten the financial stability of consumers and depress home sales in what has already been a challenging time for the mortgage and real estate industries.
Rethinking the dynamic
Taylor Stork, president of the Community Home Lenders of America (CHLA) and chief operating officer of Developer’s Mortgage Co., said that reliance on the old way of doing things between the mortgage and insurance industries likely needs to be rethought due to the impact of extreme weather on the insurance marketplace.
Stork relayed a personal anecdote. A family member living in Florida bought a house on the water at Madeira Beach. Despite buying the home with a relatively small loan, the owners became concerned about the availability of insurance and elected to strategically sell based on this concern.
The move paid off, since a hurricane arrived not long after.
“The reason I tell this anecdote is that their insurance had already gone up a lot two years ago,” Stork said in an interview. “I think it is a prelude to what we’re going to start seeing in hurricane-prone areas, which is that people will choose to leave due to economic reasons, safety and soundness reasons, and because having to start your life over after everything gets wet is a hassle.”
Rising homeowners insurance expenses resulting from climate change-induced natural disasters are emerging as “a core threat and challenge facing not only homeowners, but our industry in general,” Stork explained. “Because there’s this new element entering into the individual transaction, but it’s also entering into the geography.”
The reckoning with homeowners insurance adds another element to keep track of — on top of traditional indicators like interest rates and home values.
“As lenders, we’re starting to have to factor in the potential for insurance rates to change or to become unavailable, and it’s going to particularly hit servicers in a bigger way than it hits originators,” he said. “But it’s definitely going to change the origination calculus.”
This means the dynamic of interactions between the mortgage and insurance industries will need to evolve into something new, Stork said.
“All mortgage companies, banks and federal credit unions, we all need to be thinking about what our backup plan is, instead of only relying on the historical structures that we’ve always used,” Stork said. “Mortgage companies have always taken it for granted that there was going to be insurance. Back when I was a loan officer, I couldn’t tell you how many times I’d get to a few days before closing, and my borrower would ask about what ‘HOI’ was.”
This would lead to a scramble to get a homeowners insurance quote so that a closing could take place on time, since it was much easier to secure in the past. That’s no longer the case.
“I think that mortgage companies need to stop taking insurance for granted and start thinking about insurance as a core component of the mortgage process,” Stork said. “I think it’s time that we start looking at insurance like we look at an appraisal: make sure the house can get insured, make sure that the insurance is affordable, make sure it makes sense, that the deductible is what meets requirements and the policy meets all the regulatory guidelines.”
Projecting the impact
Consumers should likely expect insurance rates to go up in the immediate aftermath of Helene and Milton, according to Mike Fratantoni, chief economist for the Mortgage Bankers Association (MBA).
In the aftermath of the 2007-08 financial crisis, the Dodd-Frank Act and other mortgage regulations were primarily “geared to preventing payment shock,” Fratantoni said. That’s no longer the case.
“We’re essentially in a market now where there isn’t payment shock from the mortgage components anymore, and we thought we had developed a much more stable system,” he said. “So, it’s a real challenge now that payment shock is not coming from the mortgage or from the interest rate moving — because so many folks have a fixed-rate mortgage — but the increase in payment is coming outside of mortgages, from insurance and in property taxes.”
On top of this, state-level regulations on insurance premiums artificially restricted increases, and many of these restrictions have since been relaxed. Premiums shot up as a result, and capital markets for reinsurance have seen prices go up as insurers deal with the quick succession of extreme weather events, he explained.
“From a mortgage perspective, the mortgage lender’s responsibility is making sure that a homebuyer, when they get in the home, has the right amount of insurance on that property,“ Fratantoni said. “The servicer, then, over time, is monitoring that and making sure those premiums are paid to make sure the insurance stays enforced. The lender and the servicer’s responsibility, and the actual insurance pricing, that’s a whole different organization and market.”
Despite the high level of interaction, the lender has no control over the actual costs of insurance. This has spurred serious conversations, which are amplified by the devastation wrought by recent storms. MBA has heard concerns from its membership regarding a lack of thought given to home insurance policies, as consumers discover they don’t have one and then “scramble” to put one in place.
“I think that’s the biggest near-term concern,” Fratantoni said. “How we try to improve that availability for whatever changes are necessary. And then over time, I think that’ll help to stabilize the pricing as well.”
Risk modeling for storms
Tom Larsen, associate vice president of hazard and risk management at CoreLogic, explained some of the novel impacts of Helene alongside the dynamics in play for the imminent landfall of Hurricane Milton in Florida. As a model vendor, one of CoreLogic’s services is to construct risk models for insurers to better understand the severity and frequency of losses.
Insurers often have to set aside reserves each year for extreme weather events, but the increased level of volatility brought about by Helene and Milton compound issues faced over the past few years due to historic levels of inflation.
Prior reserves set aside by insurers were then complicated by rising costs for virtually everything else, which made planning for the set-asides a challenging prospect. “Because the loss numbers go up, and if their savings don’t go up equivalently, then there’s a shortfall,” Larsen said.
Climate changes adds to concerns over water, whether coming from storm surge, rising sea levels or intense amounts of rainfall, which is driven into rivers and causes flooding. The point is that the risk is constantly evolving — and at a speed that critical industries are having a hard time keeping up with.
A potential bright spot for creating resiliency against future events comes from a move to change building codes and better fortify homes against extreme weather, which has been very visible in a state like Florida. But this mainly applies to newer homes, and legacy construction will need to take a different approach.
“[Fortification] works really well in an area like Florida that’s growing rapidly, but it’s not as effective in areas like North Carolina and Georgia where the housing in those communities is not growing as much,” Larsen said.
Speed to implement any change is also an issue. Flood insurance is not required with mortgage insurance for “legacy reasons,” Larsen explained. But in certain states — including North Carolina — you’re not required to have hazard insurance if you own your home free and clear, even if you reside in a flood zone.
“That’s a challenge,” Larsen said. “But now, it starts to look like bicycle or motorcycle helmet laws. You’re requiring people to do things for their own good, even though they may not feel it’s necessary, and they realize it’s expensive.”
That’s not to say that certain areas prone to storm damage aren’t making progress. Florida recently imposed new roof requirements to better protect homes against extreme weather, which has lowered damage rates for newer homes, Larsen noted.
