BREAKINGVIEWS-Extreme weather menaces the US mortgage market

By Sebastian Pellejero

NEW YORK, July 15 (Reuters Breakingviews) - From the Hill Country deluge that killed over 100 people in Texas to Monday’s record-breaking rainfall in New York City, the human toll of extreme weather is growing. As towns across the country brace for further impact, it will also stretch America’s housing market. AccuWeather estimates losses of between $18 billion and $22 billion from the Texan storms, yet only around $3 billion of losses are covered by the National Flood Insurance Program in the hardest-hit counties. Climate-amplified disasters are dwarfing the public safety net, with the private sector left to pick up the costs.

This is a national problem. Annual damage wreaked by storms is rising. Home-insurance premiums, consequently, have jumped over 40% since 2019 to an average of $2,801, becoming the fastest-growing slice of mortgage escrow costs, according to LendingTree. Meanwhile, around 14% of homeowners now go without coverage, up from 5% a decade ago, according to Census Bureau data. Coming on top of already-high interest rates, homeowners are squeezed before severe weather even arrives.

Such strain will inevitably affect the mortgage market. Research from New York University found that a $500 annual hike in insurance premiums increases a borrower’s odds of falling behind on payments by roughly 20%. Between July 2022 and June 2023, this resulted in pushing about 149,000 additional homeowners into delinquency, the Federal Reserve Bank of Dallas reckons.

Yet investors in the $8 trillion market for bonds backed by sliced-and-diced mortgages and guaranteed by Fannie Mae and Freddie Mac seem unperturbed. Since these enterprises are wards of the federal government, any losses will presumably be socialized. True, they held around $150 billion in capital reserves by late 2024, but are well short of admittedly controversial regulatory requirements. A renewed push to end their conservatorship risks testing assumptions about both their safety and Uncle Sam’s guarantee.

Other warning signs are flashing. Reinsurers selling protection on potential losses at U.S. catastrophe coverage programs are still charging historically elevated rates, which pushes more cost through the system. If the Gulf storm season bears down on bigger markets like Houston, the combination of thin NFIP cover, uninsured homeowners, and pricier policies could push thousands of borrowers into arrears.

Texas is no outlier. Billion-dollar disasters in America have surged to 24 per year since 2020, up from 7 on average between 1980 and 2019, according to the National Oceanic and Atmospheric Administration. Their annual cost now averages $140 billion — double the long-term average. Increasingly, the test is whether the subsidized U.S. mortgage system can outrun climate costs, or whether the bill will finally come due.

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CONTEXT NEWS

AccuWeather estimates the flash floods that struck Texas over the July 4 weekend caused $18 billion to $22 billion in damage.

On July 14, New York City experienced historic rainfall, recording the single-wettest hour outside of the impact of Hurricane Ida in 2021, the New York Times reported.