Editor’s note: This column was included in the June 27 version of The Pulse, a weekly BankBeat newsletter sent to subscribers.
In this week’s installment of “Mother Nature on a Rampage,” we report rising waters in Spencer, Iowa, McCook, S.D., and just south of Mankato, Minn., where the Blue Earth River has overrun part of the century-old Rapidan Dam. For two days, the house that belongs to the owners of the Rapidan Dam Store — where locals and bicyclists have for years stopped for a slice of their renowned pie — teetered precariously over raging water. It has since fallen, joining a section of road and an electrical substation lost to the water earlier.
Like me, you are probably sitting high-and-dry, grateful that your home or livelihood isn’t about to be swept into oblivion. Yet the consequences of what has become regular fare around the Midwest — increasingly damaging, costly and deadly storms — already impacts us in the form of rapidly rising insurance premiums.
When you think about uninsurable homes, you probably think Florida or the tinder-dry western United States, not the lush hills of western Iowa or the deep valleys of south central Minnesota. In 2023, home insurers lost money in 18 states; notably, Florida and California were not among them. Using this tool, you can see how the insurance industry is faring in your state.
This article contains important data about which Midwest states insurers have abandoned, and posits what might become of the U.S. housing market when (not if) entire neighborhoods are unable to secure homeowners insurance. The situation is especially critical for multi-housing developments. The National Association of Insurance Commissioners has recently issued a multi-state data call to gain what it calls a “clear sense of what is happening in their individual property markets and the nation overall.”
Forget the troubles facing portfolios filled with CRE for just a second and consider all the mortgage loans that will go into default because homeowners cannot comply with their insurance covenants, through no fault of their own: People who’ve dutifully paid their insurance premiums and never filed a claim have seen their insurance double or triple or just disappear. This is the economic impact of climate change.
This whitepaper published by the research arm of the Mortgage Bankers Association breaks down the increased risk mortgage lenders take on in the face of climate change. It says the distribution of risk is heavily dependent on whether and to what degree a property (or group of properties) is insured and mortgaged and the degree to which mortgages are or are not included in a GSE, FHA or private label securitization structure. That might be a good way for your institution to assess climate-related mortgage risk.
The impacts of a looming crisis in the availability and/or rising cost of homeowners’ insurance are myriad, from missed loan payments to defaults, decreased home values, reduced buying power among consumers, the overall degradation of borrowers’ financial health, and broader economic decline. Many of us lived through a recession rooted in a housing crisis, and still bear the scars.
People I’ve talked to about the insurance crisis lift up hope that the federal government will step in to provide coverage when private insurers abandon the market. Maybe, but I was counseled long ago that hope is not a plan.
