The U.S. is now faced with an unprecedented health crisis: the COVID-10 pandemic. For an industry that has weathered both the 2008 financial crisis and a spate of damaging natural disasters, the existing playbooks may offer helpful guidance, but much of the current situation is unexplored territory that demands new mindsets and close examination of existing protocols and philosophies.
With tornadoes sweeping across the Southeast U.S. and hurricane season fast approaching, havoc from more traditional natural disasters may soon be overlapping with the ongoing impact of the novel coronavirus. How are servicers, lenders, lawmakers, and service providers preparing for storm season … while also dealing with a global—and ongoing—pandemic?
Changing the Playbook
As COVID-19 continues to reshape our daily lives and workflows, the mortgage industry is feeling the pressure of forbearance programs, staffing impacts, remote working, and potential liquidity shortfalls. Adding likely new rounds of natural disasters will only complicate things even further.
Homeowners are going to be hard pressed as well. It’s challenging enough to deal with the strain and stress of hurricane damage to your home, for instance, but how much more difficult will it be when combined with social distancing, possible loss of work, and other factors brought on by the pandemic?
“There will be other disasters that happen in the next several months. There always are. And to add that on top of COVID, it just complicates everything,” said Samantha Montano, an emergency management researcher at the University of Nebraska Omaha, in a recent Scientific American article.
“Customers are overwhelmed with many other things in a disaster situation, not just their mortgage,” said Dana Dillard, EVP, Corporate Social Responsibility at Mr. Cooper Group.
While valuable lessons can be ported over from what the industry has learned from decades’ worth of natural disasters, the COVID-19 pandemic is operating on a whole different scale.
“COVID is obviously nationwide, so that's very unusual,” said Gagan Sharma, President and CEO of BSI Financial. “Secondly, in a national disaster, one can typically have some visibility into when the natural disaster ends. Even when Superstorm Sandy occurred, it was over a certain number of days.”
The Economic Fallout
More than 40,000 structures were affected by the recent string of tornadoes across the Southeast U.S., causing damage that will cost in the hundreds of millions of dollars to repair. In a new report, CoreLogic identified the unique challenges added by COVID-19 to the recovery efforts.
In Tennessee, Mississippi, Georgia, South Carolina, and Alabama, approximately 23,448 structures were potentially damaged, with a total reconstruction value of nearly $2.95 billion.
As CoreLogic notes, experts are concerned that nonessential business shutdowns will drastically hinder the ability of these towns to recover through reconstruction.
Fortunately, CoreLogic states, though much construction has been halted due to the pandemic, aggregate materials should still be available for builders. With softening demand for construction materials, manufacturers have ample supplies available for distribution, though there may be regional disparities regarding access to these resources.
If reconstruction is deemed an “essential business,” the construction labor supply should be adequate, though social distancing measures will likely slow down reconstruction efforts while adding to costs. Construction monitoring in the form of permits, approvals and inspections will also be necessarily delayed.
"Displaced residents of damaged towns will experience significant ramifications of quarantine," reported CoreLogic.
After a home is damaged by a tornado, homeowners are confronted with reconstruction costs followed by additional living expenses. As a result of hotel, restaurant and retail closures, these residents will have limited last-minute housing and sustenance options. With fewer hotel accommodations, homeowners will likely experience higher housing and commuting costs. Restaurant closures will add to the struggle by limiting access to prepared food."
"With humidity, warm air and strong winds in the Southeast, many communities in the region worry that the coming storm season will bring more tornadoes and other severe weather," CoreLogic adds. "This will continue to be a challenge for the region as it simultaneously works to prevent the spread of COVID-19."
As Tom O’Connell, VP of Default Management at Planet Home Lending, notes, the major difference between a natural disaster and COVID-19 is that COVID-19 is only about employment and income or the financial impact. Meanwhile, natural disasters directly impact properties. COVID-19 may impact a servicer's ability to assess these properties.
“When a natural disaster happens, one of our procedures is to get out to the property as soon as possible to assess the damage of the property,” O’Connell said. “Will that be able to be done if the social distancing is still in place?”
Learning From the Past
The novel coronavirus pandemic is a type of disaster that few alive have ever experienced, but preparation and response must naturally rely on the lessons learned from other types of large-scale crises. For most, this means relying on lessons learned from natural disasters, and how we’re balancing the two responses.
One common challenge leading up to and in the wake of a storm or other natural disaster is ensuring prompt and efficient communication with borrowers. For many businesses, this means keeping call centers up and running. However, as servicers—like everyone else—have been forced to move toward a work-from-home environment, systems and processes that may have been taken for granted are being challenged to settle into a new way of doing business.
Sandra Jarish, President of Planet Home Lending, LLC, told DS News, “With both natural disasters and the current COVID-19 crisis that we're going through right now, you have to prepare your call agents with script, and you have to trigger a number of other tools and formats of outreach and communication to the borrowers,” Jarish said. “Tools we use include targeted calling campaigns, email blast, website updates, and social media responses, and also we've been using buck slip messaging.”
“It's really important to keep that line of communication open,” she added.
O’Connell noted another major difference between a natural disaster and a global pandemic: the lack of an end in sight, making a transition to a work-from-home environment a unique challenge.
“How long is this impact going to last?” O’Connell asked. “Then if you throw in a natural disaster that happens, are we prepared to handle both at the same time, whether it's customer service or operations? We are looking at options, but it's really predicated on COVID-19.”
Sharma echoed O’Connell’s concerns, noting that COVID-19 is far more widespread and long-lasting than a typical natural disaster, even thought the recovery period after a hurricane, for example, can stretch into the years. With no end currently in sight for the pandemic, we will be dealing with COVID-19 stacked on top of hurricane season, and Sharma suggests the economic impact will likely be severe.
The key, he notes, is to make it easy for customers to work with servicers.
“There may be some changes to investor guidelines as to what we do,” Sharma said. “If there are natural disasters on top of this COVID pandemic, and if this pandemic leads to significant job losses and so on, it'll make it even more challenging.”
“What will that do to borrower behavior?” he asked. “That's something that we'll just have to watch out for.”
The NFIP Two-Step
Another complicating factor in the midst of this crisis are the ongoing issues tied to the National Flood Insurance Program (NFIP).
In response to the COVID-19 pandemic, FEMA is extending the grace period for NFIP renewals. For customers who may be experiencing financial hardships, the agency is extending the grace period to from 30 to 120 days. This extension applies to NFIP flood insurance policies with an expiration date between February 13 and June 15, 2020.
To avoid a lapse in coverage, there is typically a 30-day grace period to renew policies. However, due to the widespread economic disruption arising from this pandemic, FEMA recognizes that flood insurance policyholders may not meet the standard policy renewal deadline.
The NFIP is currently under a short-term extension, and the next steps will be reforming the program. In a report by Christa Nadler, EVP of Risk Placement Services, Nadler dives into what problems the NFIP has faced in the past, and what the future of the program looks like.
According to Nadler, open-market flood coverage is becoming more and more vital, and “data is king.” With additional sources of data available, more carriers than the NFIP alone are looking at providing insurance.
When it comes to reforming the NFIP, Bob Butler, Director at National Flood Services, notes that Congress has been “kicking the can down the road,” continuing to renew the program under current legislation. Butler outlined the direction he believes the program should take when considering reform.
“I think they really need to take a hard look at a couple of areas,” Butler told DS News. “I think how they rate insurance coverage and determine premiums for the insurance coverage under the program probably requires a good hard look. They have a certain segment of their policy base that is what they call subsidized structures that were built before there was any flood insurance information available. They continue to get a subsidy under the program. They're not charged what we call a ‘full actuarial rate.’”
“There's no activity undertaken to mitigate those properties, to either prevent future damage or to even remove them from the flood program altogether,” Butler continues. “They continue to be able to get purchase coverage at these, some of them at the subsidized rates, and they create a drain on the overall national flood insurance fund. I think those are a couple of bigger areas.”
Following the pandemic, many believe the structure of disaster response will change drastically. For example, Jeff Schlegelmilch, the Deputy Director of the National Center for Disaster Preparedness at Columbia University, predicts a “bridge” between government and industry to accelerate collaboration across different organizations to speed up developments.
“Specifically for COVID-19, a lot of the whole-community approach to disaster management that really emerged after Hurricane Katrina and looking at how it can't just be a government solution, it needs to embrace the whole community,” Schlegelmilch told DS News. “I think in parallel, that also very much seeped over into pandemic planning and recognizing you need private sector engagement, you need government engagement, and you need community engagement.”
Jamie Kosofksy, Managing Partner, Brady and Kosofsky Law, told DS News, “The lessons being learned during the COVID disaster are going to stick around for a while.”