Climate change could deal a severe blow to the mortgage industry, claims Freddie Mac

by Ryan Smith28 Apr 2016
Climate change may pose a serious risk to the mortgage market, according to Freddie Mac.

In its monthly Insight report, Freddie Mac pointed out that flood insurance is an essential component of real estate transactions in areas of identified flood risk. But some impacts of climate change – rising seal levels and changing rainfall and flood patterns – may not be insurable.

“One challenge for housing economists is predicting the time path of house prices in areas likely to be impacted by climate change,” said Sam Becketti, chief economist at Freddie Mac. “Consider an expensive beachfront house that is highly 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, alternatively, 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 homeowner's policy? Or will the trigger be one or two homeowners who decide to sell defensively?”

If homes in flood areas become uninsurable and unmarketable, the value of those homes would plummet – perhaps all the way to zero, according to Freddie. And unlike homes that lose value in an economic downturn, owners would have no expectation that the value of their homes would ever recover. And that would spell bad news for lenders.

“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,” Freddie Mac states in a release. “It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater. As a result, lenders, servicers and mortgage insurers are likely to suffer large losses.”

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