Holly Li
Massachusetts is witnessing a dramatic acceleration in storms, floods and hurricanes, with seven billion-dollar disasters striking in just the past two years – nearly triple the historical average. This escalating pattern of severe weather represents a fundamental shift in risk exposure that mortgage lenders can no longer afford to ignore.
In Massachusetts, insurers canceled 95,847 policies in 2023, around 16.5 percent of all policies in urban and coastal areas, underscoring a volatile insurance market. Massachusetts homeowners collectively paid 17.9 percent more for their home insurance in 2023 than in 2022.
The mortgage market’s rising fragility stems partly from declining insurance accessibility, a cornerstone of mortgage risk mitigation. Between 2018 and 2023, 1.9 million insurance policies were not renewed, either because the insurance companies dropped the coverage or the homeowners couldn’t or didn’t continue it. Average American home insurance real premiums have risen by 20 percent between 2020 and 2023.
Ability to Pay Is Stressed
This insurance crisis directly impacts homeowners’ ability to pay their mortgages.
Even modest premium hikes put real pressure on borrowers’ ability to stay current. A recent study found that a $500 increase in annual insurance premiums for a $400,000 property can lead to a 27 percent spike in mortgage delinquencies. Between 2022 and 2023, premium increases alone contributed to an estimated 149,000 additional delinquencies, an 8 percent jump.
Some mortgage lenders rely on force-placed insurance – a policy the bank purchases on behalf of a borrower when the borrower’s own insurance lapses – to protect them if a home goes uninsured. However, force-placed insurance is often far more expensive and, added to a borrower’s mortgage, increasing default risk. In states like Florida, Texas, New York and Arizona, force-placed insurance contributed directly to mortgage defaults.
Complicating matters even more, mortgage lenders can no longer rely on FEMA or federal backing from Fannie Mae and Freddie Mac as a backstop to risk.
The current presidential administration has revived plans to end the federal government’s 17-year conservatorship of the two mortgage giants, which will reduce government guarantees and encourage these entities to seek private capital. Additionally, the budget reconciliation bill further slashed funding for FEMA, which had already lost over a third of the staff due to previous budget cuts.
Consequently, lenders should prepare for decreased government liquidity and guarantee support, along with a shift toward stronger risk controls in the private sector.
Identify High-Risk Properties
The evidence is clear: the mortgage industry must adapt to this new reality. Fortunately, there are strategies that prudent mortgage lenders can take to safeguard their portfolios while reinforcing the health of the market.
At the property level, data on localized climate vulnerabilities enables more precise underwriting and pricing decisions. Lenders can use existing tools, such as FEMA flood maps, wildfire risk indices and National Oceanic Atmospheric Administration climate projections, to evaluate escalating weather-related risks.
At the portfolio level, climate scenario analyses, an approach to assessing risks, along with business opportunities, based on modeling out different temperature scenarios, help banks assess how events, such as windstorms and hurricanes, impact loan performance and collateral values. Lenders can effectively diversify their portfolios once they identify their risk concentrations, whether in specific geographic areas or sectors.
Make Climate Risk Assessments Standard
Lenders can no longer rely on historical insurance risk assessments as a predictor of future coverage since they don’t account for the increasing number and severity of weather disasters or future climate impacts.
Some regions historically considered climate-safe are now at surprising risk. Case in point: the town of Barnstable, once considered a low-threat area, now ranks as high-risk for flooding, driven by increased storm surge and rainfall intensity.
Lenders can modernize risk assessment by making climate risk assessments part of the appraisal process. This means requiring appraisers to flag potential risks – such as hurricane exposure and other storm vulnerability – at the very beginning of the loan process.
Another way to update climate risk assessments is during mortgage underwriting: Lenders can begin incorporating climate risk assessments alongside evaluating creditworthiness and debt-to-income ratios.
Educate Borrowers About Risks
Helping borrowers understand the risks of their property before they sign on the dotted line can reduce long-term risks for both homeowners and mortgage lenders.
Publicly available tools like FEMA’s National Risk Index provide free, accessible data on extreme weather risks based on a region or zip code. Private data providers, such as First Street and Cotality, offer in-depth data on specific properties. These resources should become a standard part of mortgage counseling and underwriting discussions.
Lenders can also protect portfolios by encouraging home retrofits that improve resilience to extreme weather and sea-level rise. For example, Fannie Mae’s HomeStyle Energy Mortgage allows borrowers to finance resiliency measures such as storm-resistant roofs and flood-proof foundations.
The time to act is now.
Holly Li is the net zero finance program director at the Ceres Accelerator for Sustainable Capital Markets in Boston.
