FEATURED ARTICLE: Why Mortgage Applications Have to Change

zones on the condition that bor- rowers maintain proper insurance. For most borrowers, this means participating in the National Flood Insurance Program (NFIP). Unfor- tunately, the program is so broke that in 2017 Congress forgave $16 billion in NFIP debt owed to the Treasury. As this article is written, the program has been re-autho- rized, but only until May 31st. “Congress must now reauthorize the NFIP by no later than 11:59 pm on May 31, 2019,” explains the Federal Emergency Management Agency (FEMA). While it would make sense for the program to be extended until September 30th, the end of the government’s fiscal year, there’s no requirement that Congress “must” do so. The NFIP is riddled with prob- lems. The most basic is that, with changing weather patterns, we’re not so sure which areas flood and which don’t. “Even if you live outside a high- risk flood zone, called a Special Flood Hazard Area, it’s a wise decision to buy flood insurance,” ac- cording to FEMA. “In fact, statistics show that people who live outside high-risk areas file more than 25 percent of flood claims nationwide.” As much as anything, this is an indictment of the federal flood mapping system, a system which

appears to miss a lot of potential flood zones. Mark Gibbas, President and CEO of, notes that changing weather patterns are a matter of concern both for mortgage lenders and insurance providers. According to Gibbas, a Task Force on Climate-Related Financial Disclo- sures (TCDF) has been formed. “The TCDF is working to provide a framework for how lenders and borrowers will develop safeguards for doing business in a changing climate,” Gibbas told the “Housing News Report.” “This work is being done mostly at the big banking level, but it will trickle down to mortgages.” We’re now beginning to see loan applications falling through in certain geographic areas because of climate change. “This,” says Gibbas, “has hap- pened a bit, mostly due to the influence from the insurance side. What has happened is insurance companies are, in some cases, refusing to insure a property after multiple claims have occurred. The lack of insurance then stalls the mortgage process. I have not seen any cases where mortgage compa- nies refuse to underwrite the loan on their own.” He adds, “I’m also aware of new technologies coming to market that will provide insurance and/or mort- gage companies the ability to drill down on to a property to get details of past weather events and weather event probabilities. With these new tools, mortgage companies will gain insight into how to prioritize their lending opportunities.” Institutional investors are already considering climate change when evaluating financing and purchase op- tions. No doubt the same is true, less formally, among residential buyers. “Climate change and, more particularly, rising sea levels are especially urgent issues along

• The property will offer short- term rentals.

• The resident owner will essen- tially act as an on-site manager.

• The income from the short-term rentals will offset ownership costs for both the resident and investor owners. • If property values rise, the resident owner will gain equity that’s unavailable to renters. If property values fall, some of the loss will be absorbed by the investor. THE CHANGING CLIMATE Climate change is a big issue today. Is it caused by nature, human activity, or both? Regardless of the answer, the reality is that climate change is here. Melting glaciers, rising seas, stronger hurricanes, “king tides” in Miami, flooded cherry trees along DC’s Tidal Basin, floods in Nebraska, massive hur- ricane damage in Puerto Rico, and huge fires in California are all real. Does climate change impact lend- ing? You bet it does! The most immediate climate-re- lated challenge faced by lenders is on Capitol Hill. Lenders will origi- nate mortgages in high-risk flood

American coastlines,” according to the law firm of Hinshaw & Culbert- son LLP., which in April organized the Third Annual Sea Level Rise & Climate Change Conference. “In the next twenty-five years, absent radical remediation and techni- cal breakthroughs, the sea level along the coasts is anticipated to rise by up to three feet (0.91 me- ters), inundating major portions of the cities of New York, Miami, and coastal areas worldwide. Rising sea levels will result in major chang- es not only to developments and infrastructure (privately-owned structures, roads, utilities, etc.) but also to federal, state, and local laws and regulations which affect developments and infrastructure and their owners and investors. Also affected will be the insurers

that will be dealing with claims and trying to create the next genera- tion of underwriting guidelines and policy coverage. Other relevant and highly probable multi-hazard risks with climate change include greater occurrences of tropical storms and hurricanes, flash flooding, droughts, land subsidence, forest fires, and heat waves.” The bottom line: underwriting guidelines will need to be revised in the face of climate change. The National Oceanic and Atmospheric Administration already has a “Sea Level Rise Viewer” online which shows which properties will be inundated by rising water levels. In 2018, natural disasters pro- duced $91 billion in damages, a sum property insurers cannot ignore. Whether the issue is floods, winds,

or wildfires, in the end, mortgage underwriting standards will have to evolve. The practical effect is that more and more areas will face “managed retreats,” a polite term that increasingly will mean mort- gage financing is unavailable. As we look into the future, chang- es abound. Just as home buying patterns, consumer preferences, employment trends, and even the weather continues to change, so must the mortgage industry’s ap- proach to mortgage applications.

What has happened is insurance companies are, in some cases, refusing to insure a property after multiple claims have occurred. The lack of insurance then stalls the mortgage process. I have not seen any cases where mortgage companies refuse to underwrite the loan on their own.”

Peter G. Miller is a nationally syndicated newspaper columnist, the author of seven books published originally by Harper & Row (one with a co-author), and for many years a Washington-based journalist.


14 think realty housing news report

june 2019 15

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