Natural disasters can be detrimental to household income and finances. In a research report published by the Urban Institute, funded by a grant from JPMorgan Chase, Urban takes a look effects of climate change-driven natural disasters on residents’ financial health, as measured by credit scores, credit card debt, debt in collections, bankruptcies, foreclosures, and auto debt.
According to the report, homeowners in particular are often strongly affected by natural disasters, having to juggle repair costs and possible temporary housing costs along with mortgage payments. Often, homeowners may fall behind on their mortgage payments and enter delinquency, eventually leading to foreclosure.
Urban’s study found that homeowners affected by Hurricane Sandy experienced stronger and more persistent increases in delinquency than those impacted by medium sized disasters. For medium sized disasters, such as tornadoes, Urban notes that though there is often an increase in delinquency, there is not a serious increase in foreclosure, unlike larger disasters such as hurricanes.
Another key point Urban notes is that the negative effects of disasters persist, or even grow over time, for important financial outcomes. The report calls for lenders and government sponsored enterprises to update existing mortgage delinquency and foreclosure policies to account for these long-term financial burdens following disasters.
Homeowners may also face a higher risk of foreclosure if they are underinsured. According to Frank Nothaft, Chief Economist for CoreLogic, “The disruption of a family’s regular flow of income and payments, as well as substantial loss in property value, can trigger mortgage default; especially if homeowners are underinsured and cannot afford to rebuild.”
CoreLogic’s 2019 Insurance Coverage Adequacy Report notes how each area at high risk for natural disasters, such as Southern California and wildfires and the Northeastern Atlantic and Gulf Coast regions from Hurricane damage, as well as Tornado Alley, can be impacted by insufficient funding.
California, according to the report, has seen an increase in reconstruction costs following recent wildfires, and these increases can cause significant undervaluation for the insurance industry.