The costs of the recent hurricanes
that struck in August and September are coming home to roost. The first two in the recent rolling series are,
in fact are largely blamed for the first job loss in 80 months, a 33,000
deficit in September. Last week we
reported a Black Knight Financial Services' estimate that lenders had $705
billion in unpaid principal balances exposed to risk from Hurricanes Harvey and
Irma which caused massive destruction in Texas (and to a lesser extent
Louisiana) and Florida (and Georgia) respectively. Not yet plugged into the
accounting is the near total devastation in Puerto Rico and the U.S. Virgin
Island from Irma and Maria and the still unfolding story of damage from Hurricane
Nathan that came ashore last weekend.
The Urban Institute (UI), in an
article in its Urban Wire blog, says
it is time lenders and other stakeholders "enhance their existing toolkit" to
help homeowners cope with the increasing numbers and severity of such disasters.
They point out that the cost will eventually be borne by more than just the
homeowners, lenders, and other stakeholders initially and directly affected.
As the destruction from the first
two storms came into focus, "Mortgage market stakeholders-regulators, housing
agencies, servicers, consumer advocates, and nonprofits- offered immediate assistance
to affected households," the paper's authors, Karan Kaul and Laurie Goodman,
say. Fannie Mae, Freddie Mac, and the Federal
Housing Administration (FHA) announced an automatic 90-day forbearance (with
possible extensions) for affected borrowers and temporary moratoria on
foreclosures and evictions to give affected families time to gather and
rebuild. The agencies have also instructed mortgage servicers to waive late
fees associated with delayed payments and suspend credit bureau reporting for
the time being.
While this will help, UI says, there
are limits to forbearance (temporary payment relief) and loan modification (permanent
reduction in monthly payment) as disaster recovery tools. Forbearance tends to be most effective during
financial disruptions such as job loss or a temporary increase in
expenses. If a borrower can defer a few
monthly payments it gives some breathing room, enabling them to stabilize their
financial situation.
Recovery from a Hurricane, tornado,
or wildfire however can be a long-term affair. Borrowers need to assess the
extent of damage, sort out insurance coverage, file a claim, wait for approval,
and then schedule repairs and rebuilding at a time when materials and labor are
probably stretched thin. While dealing
with the physical damage, homeowners must keep their household safe and
sheltered as well. UI says temporary
forbearance is unlikely to help many in this position.
Borrowers may be able to follow up
the forbearance period with a loan modification, but any reduction in the
monthly payment is likely to be offset by the cost of rebuilding which is
likely to be higher than normal and take longer.
Solutions are further affected by
the recent rise in mortgage rates. Following the financial disaster of 2008, loan
modifications provided significant payment relief to delinquent borrowers
because interest rates were falling. Most
borrowers today already hold very low-rate mortgages so rate reductions won't help
much to reduce monthly payments. Instead,
modifications will be heavily reliant on capitalization and term extensions. While still useful in achieving payment
reduction, additional accrued interest makes them expensive over time, and they
may not provide a sustainable reduction in monthly expenses for those with
substantial damage.
Many borrowers, hit with the double
financial burden of resuming monthly mortgage payments while assembling funds
for repair may choose to abandon their damaged or destroyed homes. Those with
small amounts of equity or inadequate insurance coverage are at higher risk of
doing so.
Fannie Mae and Freddie Mac (the
GSEs) have a loan modification toolkit that is more flexible and easier for
both borrowers and servicers to use than are those from FHA, the VA, or private
lenders. Accordingly, their borrowers could receive better and faster
assistance than others, even if the damaged homes are next to each other.
Perhaps as policy makers see this disparity in action they will see the importance
of working toward a more efficient loss mitigation toolkit, one where assistance
is based on borrower and property circumstances as opposed to who owns the
mortgage.
What is needed, UI says is an
efficient market for rehabilitation financing. FHA currently offers lending products geared
toward repair and reconstruction, and the GSEs have home renovation products. Borrowers are largely unaware of these
programs and underwriting them requires specialized skills such as monitoring
and documenting the repairs which many lenders don't have in-house. They also carry elevated repurchase risk.
Under current disaster guidelines,
servicers are not instructed to evaluate borrower eligibility for
rehabilitation financing when modifying a loan, even though efficient access to
such financing might lead borrowers to rethink abandoning their homes. A pilot
program that requires servicers to educate and evaluate borrowers for
rehabilitation financing options and makes this financing easier to access is worth
considering.
UI says the eventual housing costs
related to hurricanes will spread beyond the areas where they occur. "Every
damaging storm that strikes takes us one step closer to a world where this cost
will begin to get priced in, through higher mortgage rates, higher insurance
premiums, and possibly curtailment of credit in coastal communities. The
mortgage ecosystem, together with policymakers, will have to figure out how to
work through these issues."