Tuesday, September 19, 2017

Will homeowners abandon their hurricane-damaged properties?

That's the question posed by CNBC.  It holds profound implications for the mortgage financial sector.

New estimates suggest as many as 300,000 borrowers could become delinquent on their loans and 160,000 could become seriously delinquent, that is, more than 90 days past due, when banks initiate foreclosure proceedings ... That is four times the original prediction because new disaster zones were designated and more homes flooded when officials released water from reservoirs to protect dams. The total number of mortgaged properties in disaster zones is 1.18 million. Houston disaster zones contain twice as many mortgaged properties than Katrina zones, with four times the unpaid principal balance.

After Hurricane Katrina, mortgage delinquencies in Louisiana and Mississippi disaster areas spiked 25 percentage points. The same could happen in Houston, as borrowers without flood insurance weigh their options. They will get some federal relief, but if rebuilding would cost more than the principal in their homes, they could decide to walk away.

There's more at the link.

Zero Hedge adds:

Combining the preliminary estimates for both Harvey and Irma suggests that over 3.3 million total mortgaged properties are located in Irma and Harvey-related FEMA Disaster zones, while the dollar amount of total unpaid mortgage balances in these two zones is massive: between Irma's $517 billion and Harvey's $179 billion, the total potential damage could impact as much as a $696 billion in notional mortgage values, which banks could be on the hook for if current occupiers decide to simply walk away.

Again, more at the link.

This highlights an anomaly in US mortgage finance law, one that does not exist in most of the rest of the world.  In several US states, a mortgage is classified as so-called 'non-recourse debt';  i.e. it's secured only by the property against which it is granted.  If the mortgage holder defaults, the property may be seized and sold to pay off as much as possible of the mortgage bond, but the holder's other assets may not be seized in the same way, and the holder may not be sued for the balance (if any) of what was originally owed.  In other states, there is a right of recourse, but it may be more or less limited according to local law.

This issue exposes the mortgage holder to much greater risk when it comes to hurricane-damaged properties.  If the homeowner discovers that his insurance payout is much less than the present value of his home, and/or much less than what it will cost to repair his home, and if the mortgage holder's recourse is limited, he may simply decide to walk away from it, cease paying the mortgage, and let the mortgage holder deal with the problem.

I posed this question after Hurricane Katrina, when I wrote:

What about mortgages on properties that are now underwater? The occupants can't and won't pay, but the mortgage holders will demand payment.  We could end up with massive foreclosures on property that is worthless, leaving a lot of folks neck-deep in debt and without homes (even damaged ones).

The problem is likely to be much worse after Hurricanes Harvey and Irma, which affected a much larger area between them.  To make matters worse, more storms are already active in the North Atlantic Ocean, and may potentially strike this country.

This problem, in turn, means many financial institutions may have to take a long, hard look at whether or not it's still profitable to grant mortgages in areas vulnerable to such natural disasters.  If they can't adequately protect their investments by insurance or other means, then is it still worth making them?  That may affect potential homeowners in those areas for much longer than the hurricane damage will take to repair.  Some sort of state guarantees may be necessary to persuade financial institutions to continue to finance home construction and purchases - yet another burden on already over-extended state budgets, and on taxpayers.



mark leigh said...

Government subsidized insurance is immoral, taking wealth from some and giving it to those who wish to live dangerously serves no god at all. State subsidies to build in flood plains and disaster prone areas would make the problem worse. If people wish to live in these places they must pay the full cost for doing so, not steal from others to pay for their pleasure.

MrGarabaldi said...

Hey Peter;

What a lot of them will do is take the money, go find another house far away and buy it before the foreclosure hits their credit. The flipside is that the banks will issue a "1099" to the owner for the difference in the value of the property pre and post disaster thereby exposing the homeowner to extra taxes....The homeowner can try bankruptcy to discharge the debt....very murky.

Mad Jack said...

I would think that in a situation like that, the homeowner could make a deal with the mortgage holder. If the insurance refuses to pay off or pay in full, and there's no house left to live in, the choices are few. If the State really wanted to help the situation, they'd do so by regulating the insurance companies.

Andrew said...

I can see the mortgage companies taking a more active interest in building codes and retrofitting like insurance companies did in South Florida after Hurricane Andrew (windows, doors, hurricane clips, etc.) and the insurance companies did in the Gulf region after Katrina (suddenly lots more houses only insurable if above the 'expected water line' whether from moving to higher ground or stilting.

So, recap, mortgage companies should not finance house unless it meets or exceeds hurricane standards, and is built in such a way as to not flood at the drop of a hat.

I believe both the insurance and mortgage companies have 'facilitated' towns along the Mississippi, that have historically been flooded over and over, to move upwards using just this type of pressure. Money talks, and money can make people move their 'rebuilt' home to higher pastures.

Will said...

Since the Fed is creating money now, they can simply issue replacement funds to the banks to cover the losses. The banks will hold onto the land, and eventually most of the useful land will be owned by the federal and state governments, and the banks. (The banks will just be playing catch-up, actually)

Aesop said...

Banks might begin taking a sensible, conservative, long-term view of loans, instead of short-sightedly going for the loan and counting it as an asset instead of liability?

Sh'yeah. When I see it, I'll believe it.

Just red-line everything in the perennial flood plain, and solve the whole problem. Make any bank officer personally financially responsible for defaulted loans in those areas. Then folks will have to stop building in river bottom and ocean flood zones, and the beaches will revert back to everyone, for public use.

Combine that with a few million college loan defaults for worthless degrees, and banking will become a blood sport again.

Best beat the run, and get out early.

urbane legend said...

Y'all are talking sense and responsibility. When has that had a place in anything a government was involved in?

HMS Defiant said...

You know you just nailed the whole reason the 2008 global financial collapse happened. It was every bank selling bundled home mortgages to buyers as credit default swaps and why would every bank bundle and sell home mortgages like that? Well, obviously because, as you just said, the only thing of value in the mortgage was the house and if the house was worthless the bank was on the hook for the full and total amount of the mortgage loan. Pretty clever of you to see it happening again. You can read more at https://www.thebalance.com/2008-financial-crisis-3305679

Anonymous said...

" If they can't adequately protect their investments by insurance or other means,"

See that's a big part of the problem. For one, insurers in the state of Florida aren't spreading the risk adequately, as insurers in FL are seperate enties within the state and are not tied to the larger pools that many "national" firms imply. Florida has some odd insurace laws and part of that includes provisions for a "state" insurace fund/insurer (Citizen's) to insure properties that other insurance companies wont. And, as someone previously mentioned, it's paid for by everyone that has insurance through regular insurance firms as a required line item in the policy purchase agreement. You are correct that market conditions would naturally move people out of disaster prone areas if they couldn't get insurance in order to get a mortgage, but the laws have been subverted in was that allow the unscrupulous to game the system. It's sadly another case of bureaucratic bs.