A foreclosure crisis spurred by climate change is becoming a real threat to the mortgage industry as extreme storms and other natural disasters increasingly occur in places where borrowers might not have flood or fire insurance.
The industry is not prepared for the effects of such extreme weather and rising sea levels, according to Ed Delgado, CEO of national mortgage trade association the Five Star institute and a former executive at Freddie Mac.
"If we look at the basic foundation of what drives the mortgage market, it is the application of credit risk. What's missing is the understanding of weather risk and where those weather events can take place," Delgado said.
The current system is reactive and local and doesn't include plans for the widespread effects of climate change. That could affect several major housing markets at once.
As it stands, after major natural disasters, mortgage servicers follow guidelines from Fannie Mae, Freddie Mac and the FHA, which own or insure most home loans today.
The guidelines usually involve a temporary moratorium on foreclosures, as well as loan forbearance programs, which allow borrowers to miss a few months of payments but then extend the length of the loan.
This helps borrowers who need to rebuild and may be waiting for insurance payments to repair damage. It also helps people who have lost their salaries temporarily due to a disaster. Again, these are momentary solutions to singular events.
The mortgage market is not factoring the overall risk into its loan underwriting and is not quantifying the amount of potential losses should a wide swath of borrowers walk away from damaged or destroyed homes.
"Whether it's fires and mudslides in California, flooding in Texas, or tornadoes in the Oklahoma region," Delgado said. "It's going to be a problem if the banks don't start to pay closer attention to what those weather risks are."
As an example, Hurricane Harvey, which struck in August 2017, flooded close to 100,000 Houston-area homes. In Harvey's federally declared disaster areas, 80 percent of the homes had no flood insurance, because they weren't normally prone to flooding. Serious mortgage delinquencies on damaged homes jumped more than 200 percent, according to CoreLogic.