This piece originally appeared in the March 2022 edition of DS News magazine, online now.
Climate change is accelerating the number and severity of climate- and weather-related disasters that will have far-reaching impacts on the housing finance industry. The stakes are high for mortgage lenders and servicers and the borrowers they serve, as these events threaten both purchase loan pipelines and servicing portfolios. When disaster strikes, could data hold the key to a more fluid industry response?
Disasters Are Here to Stay
According to a National Oceanic and Atmospheric Administration (NOAA) report, the United States bore 20 distinct billion dollar-plus climate and weather events in 2021, making it the third-most-costly year on record with an estimated $145 billion in damages. In December, a multistate thunderstorm unleashed tornadoes that carved a 200-mile path of destruction across Kentucky, leveling the homes of more than 1,000 families. In the fall, Hurricane Ida pummeled homes in the Gulf states, where it made landfall before inundating the Northeast with severe rain and flooding. And throughout the year, 8,619 wildfires across the state of California charred over 2.5 million acres of land and reduced thousands of structures to ash.
An examination of data from the last four decades shows that these disasters have become more frequent and costly over time due to increased exposure (more property to damage), increased vulnerability (more properties being exposed to conditions they were not built to withstand), and climate change. Even when adjusted for inflation, incurred in the last five years account for a third of the $2.155 trillion total in disaster damages since 1980.
Projections indicate problems will continue to grow. An analysis developed by the Risky Business Project—an organization focused on quantifying the economic risks of our changing climate—estimates that by 2050, between $66 billion and $140 billion in real estate will be below sea level. A report from the Mortgage Bankers Association adds expectations of increasingly devastating storms, excessive heat and wildfires, drought, and more.
To the mortgage industry, these numbers are more than mere abstractions, as structural damage to buildings and homes makes up the lion’s share of losses caused by climate and weather disasters. When flooding, wildfires, and other events wreak havoc on properties and upend lives, pending home purchases get derailed and homeowners default on mortgage loans, creating what Housing Finance Agency (FHFA) Acting Director Sandra L. Thompson describes as “a serious threat to the U.S. housing finance system.”
As the FHFA and its regulated entities juggle their need to reduce the liability of securitizing mortgage loans in disaster-prone regions with their charge to equitably meet the housing needs of communities, boots-on-the-ground mortgage lenders and servicers are left to manage the immediate fallout.
Data Disaster: A Hurdle for Lenders and Servicers
The stakes are high when it comes to disaster response, making it imperative for lenders and servicers to contact impacted homebuyers, homeowners, and business partners to provide relevant assistance and communication as soon as possible. However, lenders and servicers that rely solely on the Federal Emergency Management Agency (FEMA) as a source of disaster impact data put themselves, and ultimately the homeowners they serve, at a disadvantage. That’s because FEMA disaster data often lags by days or weeks—resulting in delayed response times—and is too broad, which makes identifying impacted properties a time-consuming and resource-intensive task.
To address loans impacted by natural disasters while maintaining margins, lender/servicers need better disaster intelligence and a more automated way to notify the appropriate stakeholders. Luckily for lenders and servicers, advances in technology are giving them an unprecedented view into disaster impact as events unfold and enabling them to communicate at scale.
Though not yet widely adopted, technology currently exists that gives the mortgage industry insight into disaster impacts with greater accuracy and speed than FEMA data alone. Today’s disaster intelligence can identify properties likely affected by climate and weather events, pinpointing the street address with parcel-level accuracy by overlaying precipitation, storm paths, floodplain maps, and burn radiuses over property maps and updating this information daily as events unfold.
Lenders and servicers can then integrate addresses identified by disaster intelligence and run them against pipeline and portfolio data to determine which files have likely been impacted and alert the appropriate stakeholders that action is needed.
As large-scale climate and weather events become the new normal, disaster intelligence will play an integral role in servicers’ and lenders’ responses.
Benefits for Servicers
Modern disaster-tracking technology enables servicers to address three primary concerns: communicating with borrowers, protecting properties, and providing compliant service.
For one, the ability to identify the number and locations of properties affected by a disaster with greater precision helps servicers provide better assistance to victims. Servicers can use this data to staff call centers with representatives who have been trained on disaster-related issues, schedule staff with language skills relevant to impacted communities, and generally ensure staffing is sufficient to prevent situations where customers languish on hold or are forced to play phone tag as they are trying to pick up the pieces.
Better disaster impact data also makes it possible for servicers to identify damaged properties—and exclude unaffected ones—more quickly and with greater accuracy. While FEMA disasters are reported at the county level, disaster geofencing enables servicers to understand the breadth of impact with greater precision. For instance, if an isolated wildfire touches five California counties, FEMA will unilaterally declare all five of those counties as disaster areas. Giving servicers the ability to narrow down an area of impact from millions of buildings to a few dozen homes makes it possible to assess and triage damage quickly and efficiently. It also saves servicers the cost of dispatching resources to unimpacted locations.
When integrated with servicers’ systems of record, disaster intelligence can help them quickly understand their risk and hedge their portfolios accordingly. That’s because disasters produce increases in mortgage defaults, and the cost to service a nonperforming mortgage is significantly higher than the cost to service a performing mortgage. Likewise, disasters increase prepayment rates, another portfolio risk that must be managed.
Benefits for Lenders
Disasters don’t just pose challenges to mortgage servicers; they also disrupt front-end home purchases and sales. In the moment of a catastrophe, lenders—who are less accustomed to managing the complications of disasters—often scramble to understand how their deals are impacted by an event. Not knowing stresses prospective borrowers and increases costs for lenders, real estate agents, and settlement partners as time is spent spinning wheels trying to decide on next steps.
However, when equipped with technology that brings visibility into loan files affected by disaster, lenders can develop a better business response. Disaster-tracking intelligence is often capable of differentiating between areas that have a high probability of substantial property damage and so-called “buffer zones”—surrounding areas where properties may or may not be affected. The ability to narrow down properties impacted by a disaster enables lenders to save on resources.
For instance, the right data can help lenders feel confident in moving forward with closings for addresses that are outside the immediate impact area and surrounding buffer zones. And within buffer zones, lenders may be able to save money by ordering drone or drive-by appraisals to determine if properties have sustained damage that warrants a new inspection or collateral valuation.
Disaster intelligence also helps lenders manage their pipelines. Because disaster intelligence can determine properties affected at the street address level, loans that have likely been damaged or destroyed can be flagged, making lenders aware of files that will require lock extensions or present revenue risk.
And lastly, disaster intelligence helps lenders be a better partner to borrowers and business partners. Disaster intelligence may make lenders the first to know when a property is affected, giving them the opportunity to proactively reach out to homebuyers, real estate professionals, and closing partners to notify them of damage or closing delays.
No one knows exactly when disaster will strike. But with disaster-tracking intelligence integrated with systems of record, lenders and servicers can better assist impacted homeowners while improving their ability to manage associated business risks.