Climate Change, Real Estate Mortgages, Flood Insurance and You

From https://www.reuters.com/article/us-climatechange-mortgages-idUSKBN1WE0D3

“The market’s failure to integrate climate science with investment analysis has created a mispricing phenomenon that is possibly larger than the mortgage credit bubble of the mid-2000s”

“a key culprit for the mispriced risk in the U.S. mortgage market is outdated flood maps drawn by the federal government.”

“Due to budget cuts, more than three-quarters of the maps have not been updated in at least five years”

“Outdated maps mean far fewer people are required to have flood insurance than are at risk,”

“The gaps are evident: About 70% of all damages to homes that were flooded during Harvey were not covered by insurance”

“the gaps mean the risk is not properly priced. The cost for an average policy in low-risk Green Bay, Wisconsin, for example, is three times that in Gulfport, Mississippi, a town devastated by Hurricane Katrina”

“The Federal Emergency Management Agency has said it aims to fix some of these problems with a major risk re-rating on Oct. 1, 2020.”

“Burt’s bet is that the move will result in significant cost increases. That in turn will lead to home price declines and mortgage losses, which would increase volatility in RMBS prices.”

“He expects a correction beginning in the next 6-18 months. ”

“Investors also have been taking on more risk. Some RMBS issued by Freddie Mac and Fannie Mae since 2017, called credit risk transfer (CRT) deals, move the risk of default to the investors. In traditional agency RMBS, Fannie and Freddie cover those losses. “

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