Climate change’s potential impact on the housing market needs to be more carefully considered, according to Freddie Mac in its monthly insight for April. The issue focused on flood challenges the industry could face in the future.
The controversial climate change issue has been discussed nationally, but this is one of the first times a large mortgage company has suggested that coverage and rates should take it into consideration. Some impacts of climate change, such as rising sea levels, changing rainfall, flooding patterns and rising temperatures, may not be covered under homeowners’ insurance policies, Freddie Mac states.
Freddie Mac researchers state that, “If those homes become uninsurable and unmarketable, the values of the homes will plummet, perhaps to zero. In the housing crisis, a significant share of borrowers continued to make their mortgage payments even though the values of their homes were less than the balances of their mortgages but if the compete loss of a home results from climate change homeowners will have no expectation that the values of their homes will ever recover. It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater.”
If climate changes makes some home uninhabitable, lenders, servicers and mortgage insurers could suffer significant losses. They say that housing finance needs to take into account the dangers of climate change to protect homeowners and the mortgage industry from losses.
One challenge for housing economics is predicting the time path of house prices in areas likely to be impacted by climate change. Consider an expensive beachfront house that is likely to be submerged eventually, although “eventually” is difficult to pin down and may be a long way off. Will the value of the house decline gradually as the expected life of the house becomes shorter? Or, will the value of the house, and all the houses around it, plunge the first time a lender refuses to make a mortgage on a nearby house or an insurer refuses to issue a homeowners’ policy? Or will the trigger be one or two homeowners who decide to sell defensively?
Under current federal law, flood insurance is mandatory for all federal or federally related financial assistance for those who own in a designated Special Flood Hazard Area (SFHA). Freddie Mac requires flood insurance before it will purchase a loan for a property in an SFHA.
As the market shakes out in the affected areas, some residents will cash out early and suffer minimal losses. Others will not be so lucky. And newcomers may appear, finally able to live out their dreams of living at the seashore, if only for a short time.
