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A Confluence of Events

floodingEditor’s note: this piece originally appeared in the October edition of DS News.

Hidden deep in the news on July 22 was the report that Tropical Storm Gonzalo was forecast to become a hurricane. That same day, it was reported that a tropical depression was slowly gaining strength in the Gulf of Mexico. Although it was too early to predict the eventual impact these storms might have on the U.S., the reports were cause for concern. 

Hurricane Season Is Upon Us 

COVID-19 has dominated the news for the past several months, and consequently, we have tended to overlook the reality that there have already been six tropical storms in the 2020a record for this early in the year.  In fact, for those who are counting, there have been 24 major disaster declarations up to July 10th. Lest we be lulled into a state of complacency, we need to understand the seriousness of the situation we are facing. 

In the Northern Atlantic Ocean, a distinct hurricane season occurs from June 1 to November 30, sharply peaking from late August through September; the season's climatological peak of activity occurs around September 10th each season. Weather.com reports that seasonal forecasts continue to call for a hyperactive Atlantic hurricane season in 2020well above the 30-year average.  

Delinquency Rates 

Historically, the impact of hurricane season on mortgage delinquencies is significant. Studies indicate that post-disaster delinquencies for impacted areas increase more than 100%, and often remain high for years. The effect during a pandemic could be even more calamitous. 

Following a dramatic rise associated with the subprime mortgage crisis of 2007-2010, the U.S. mortgage delinquency rate had been trending back towards the long-term average over recent years. Then, COVID-19 changed everything. 

In March, as the coronavirus began to affect the U.S. economy, just 3.39% of borrowers were delinquent However, as per Black Knight’s May 2020 Mortgage Monitor Report, the nation's overall delinquency rate for this April reached its highest level in more than eight years. 

According to Frank Nothaft, Chief Economist for CoreLogic, The COVID-19 pandemic has shocked our economic system and led to unprecedented job loss, reducing the ability of affected families to make their monthly mortgage payments. The latest forecast from the CoreLogic Home Price Index shows prices declining in 41 states through April 2021, potentially erasing home equity and increasing foreclosure risk.” 

A glance at the following map indicates that of the 19 states that exceeded the national average for non-current mortgage loans in May of 2020, nearly all fall in areas that are prone to exposure to tropical storms and hurricanes. Combine high current mortgage delinquency rates with a high potential exposure to disastrous storms during a hyperactive hurricane season, and the cause for concern is obvious. 

Unemployment 

In addition, COVID-19 has relegated many Americans to the unemployment rolls. The Pew Center reported in June that unemployment rose higher in three months of COVID-19 than it did in two years of the Great Recession. The number of unemployed soared from 6.2 million in February to 20.5 million in May 2020. The U.S, Bureau of Labor and Statistics reported on July 17 that the national unemployment rate was 11.1% , or 7.4 points higher than it was in June of 2019. 

The Insurance Gap  

Ninety percent of all natural disasters in the U.S. involve some type of flooding. Unfortunately, few homeowners purchase flood insurance. For example, 80% of Texas homeowners and 60% of Florida homeowners do not have flood insurance. The insurance gap is significant, and its ramifications are serious. 

The online environmental magazine Grist reports that while 62% of homeowners across the nation say they are prepared for a flood, just 12% of them have flood insurance. As we enter the high season for disasters, the Harris Poll found that people have little interest in buying flood insurance because the coronavirus pandemic has hurt them financially. Without insurance, relief from floods primarily comes in the form of loans. For many in this difficult time, a loan is not an option. Disaster victims do not need more debtthey need debt relief.   

So, let’s put this all together: 

  • We are entering what is expected to be a hyperactive hurricane season 
  • The nation’s overall delinquency rate is the highest it has been in nearly a decade, and some of the states with the highest rates are in disaster prone areas 
  • Home prices are declining, eroding equity 
  • The nation’s unemployment rate is higher than it has been in years 
  • Flood insurance coverage for homeowners in harm’s way is unrealistically low 

This could be the most promising moment in the history of the IRS casualty loss program. 

For homeowners, lenders and servicers, the IRS casualty loss program could be a blessing. This program allows victims of federally declared disasters to claim unreimbursed losses as tax deductions. Those deductions can be of immediate benefit if claimed on an amended tax return, or they may be reported for the year in which they occurred. Regardless, they can result in thousands of dollars that can be used for property repairs, to purchase necessities, or to avoid delinquency. The money belongs to the homeowner. It is their money and does not need to be repaid. 

Lenders and servicers would be wise to include reference to this program in their outreach messaging following a disaster. Mortgage loan customers are probably unaware this program exists. Here is a real opportunity to provide valuable financial help to customers during a time of need, which might also serve as the finest customer retention tool ever employed. And, if you are engaged in customer outreach, why not contact victims who are non-customers as well. What a great customer acquisition opportunity!  

Regardless of how the IRS casualty loss program is incorporated into your outreach program following a disaster, it is an option that cannot be overlooked at this historically difficult time. 

About Author: Mark L. Stockton

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Mark L. Stockton began both appraising real estate and banking in the late 1960s. As president of a community bank in the mid ‘70s, he designed and developed the nation’s first comprehensive bank software. It would ultimately be used by one out of every three banks in the U.S. With the help of the University of New Mexico economics department and a renowned real estate litigation firm, Stockton developed the country’s first computerized residential valuation system in 1981, which produced automated valuations (AVMs), appraiser assisted valuations, traditional appraisals, and evaluations. An automated tax assessment system was added shortly thereafter.
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