Homeownership Is Underwater, Up In Flames, Or In The Wind

The 30-year mortgage was designed with that amortization schedule to provide a hedge against volatility and inflation, but because borrowers are not being underwritten for long-term affordability, and homes are not being underwritten to emerging, asset-level climate risks, ballooning escrows are functioning like piggyback, adjustable-rate mortgages, which is bad math for consumers.

“Those big spikes in insurance change the contract that homeowners sign when they get a mortgage,” says Jeremy Porter, director of Quantitative Methods in the Social Sciences at City University of New York, who leads the Climate Implications Research team at First Street Foundation, a climate change modeling and analytics firm. “They would’ve worked that into the household economics of owning a home.”

Insurance executives, economists, actuaries, and scientists have testified to the Senate Budget Committee that as underinsurability rises, property values in affected markets will decline, insurance unavailability will cause affected properties to become unmortgageable, and the “wide-scale decline in coastal and wildland-urban interface community property values would present a systemic risk to the U.S. economy, similar to what occurred in the 2007-2008 mortgage meltdown,” according to publicly available documents.

“If you open up the hood and you find out, in fact, there is flood exposure, your property value goes down,” the White House advisor explains. At play, in the face of mounting threats from flood to fire to tornadoes, from wind to drought to hail, is collateral — homeowners and homes — not underwritten to the risks they actually present.

As insurers and investors re-risk every U.S. home on the basis of its insurability, adjusting portfolios to prepare for a climate-adjusted future, government housing agencies are racing to remediate widespread, self-inflicted insurance shortfalls on their books. At this very moment, re-risked homes nationwide securing trillions of dollars of mortgage securities warrant lower valuations.

As the cost of homeownership surges in some places and home values fall in others, those buying homes today, or who bought since 2020, are not being underwritten for either scenario.

“There is a severe underinsurance problem across all perils,” says Ben Madick, founder and CEO of Matic, a digital insurtech platform plugged into the mortgage ecosystems of hundreds of mortgage lenders and servicers nationwide. Underinsurance worsens, he said, as the impacts of climate change accelerate, consumers’ ability to afford coverage dwindles, and long-standing insurance gaps widen on properties that will simply be abandoned.

For homeowners, lenders, housing agencies, and real estate investors, community uptake of insurance is as critical to “securing” the values of individual homes as the requirement for individual borrowers to carry coverage in the first place. Only as valuable as the community of policies in force to replace a community of home values, insured homes in underinsured communities are depreciating assets to insurers, whose primary concern is replacement cost.

In that light, underinsurable homes — and underpriced mortgages — have become the proverbial cigarettes or opioids — known for their toxicity, but pushed on consumers without an appropriate label. ‘Houses’ assume the pedestal of ‘homes,’ and ‘mortgages’ the pedestal of ‘enabling homeownership.’ But, the assets themselves are simply consumer products being marketed and sold without their full extent of risk conveyed by lenders, insurers, risk assessors, and government agencies whom consumers rely on for guidance.

“All of a sudden,” First Street’s Porter contends, “you have people that probably would’ve bought a cheaper house if they knew that their insurance was going to be that much.” Yet, insurance increases hammering borrower budgets in recent years are only “the first mechanism to price climate into the real estate market.”

Housing stakeholders interviewed for this story agree that those who bought homes in the past five years should consider whether buyers in the next five years will pay the prices sellers seek for homes deserving lower valuations on account of their underinsurability. Consumers remain unaware of this reality despite widespread recognition among those who facilitate home-buying that homes and mortgages nationwide are building up these unpriced risks.

“Who owns the ultimate risk?” Madick asks. “It’s certainly the taxpayers. It’s not one of the industries and it’s not a government entity.” The question for homebuyers is no longer how much home they can afford to buy, but how much home they can afford to insure — or put differently, how much home they can afford to continue living in.

Government entities with “weather- and climate-related budgets” that did not exist a decade ago now “have teams focusing on this to say, ‘These markets are changing. The risks to our bond holders are different, the risks to customers are different, and we need to start setting it,’” Madick continues. 

Those budgets stand to disappear or shrink dramatically under a second Trump administration. Meanwhile, federal agencies continue buying and guaranteeing mortgages for properties lacking minimum insurance coverage as required by federal law. Banks and nonbank mortgage lenders continue to originate underinsured, government-subsidized mortgages in the U.S.’s riskiest markets. Homeowners are not being told the risks they face.

Flood insurance, for example, is still only required for federally guaranteed mortgages on homes in FEMA-designated flood zones. Regulators, scientists, actuaries, and underwriters long have known that FEMA flood zones “cannot provide members of the public with a reliable rendering of their true flood vulnerability or ensure that NFIP rates reflect the real risk of flooding,” according a 2017 internal watchdog report.

“Some of these properties are built in areas that just never should have been built upon,” says the White House advisor, confirming a contagion crisis looms, checked only by a supply shortage locking homeowners into whatever unpriced risks their homes carry now. “What’s going to happen is it’s going to be stranded assets everywhere.”

“We’re certainly trending in that direction,” says Peter Carroll, executive vice president of public policy and industry relations at CoreLogic, government housing agencies’ preferred provider of property- and market-level climate risk data and modeling. “It’s like we’re heading down a hill and there’s a cloud line beneath us, and we know there’s a wall beneath that, but we don’t know if it’s 10 miles farther down the hill or right in front of us.”

Since May 8, 2024, the Federal Housing Finance Agency (FHFA), regulator of the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, has indefinitely suspended citations for mortgage lenders’ and servicers’ noncompliance with long-standing minimum insurance requirements for federally guaranteed mortgages. Yet, lenders and servicers are still on the hook for losses resulting from insufficient coverage as insurers are increasingly unable to offer affordable insurance products borrowers are required to have under federal lending laws.

Experts agree the system’s weakest link is not the insurance market or mortgage market, but homeowners and their waning capacity to absorb rising costs of homeownership. The market widely accepts that mispriced mortgages are being underwritten, bought, and packaged into mortgage-backed securities (MBS) by Fannie and Freddie.

Average Insurance Premiums Increased by Hundreds to Thousands of Dollars in the Last Four Years

Source: JEC Report on Climate Risks to the Insurance and Housing Markets: National Resilience Index, First Street Foundation, and Keys and Mulder 2024

“We’re trending toward more radical changes in the insurance system,” says Steve Bochanski, U.S. lead for climate-risk modeling at PricewaterhouseCoopers (PwC), the global accounting and professional services firm. “You’re not going to be able to react on a year-by-year premium cycle. Letting the insurance gap continue to grow is not viable, relying on state insurance pools is not viable. That just puts the cost back in the hands of the taxpayers.”

A lack of insurance in the community impacts property values “because it’s not just your property,” says First Street’s Porter. “If there’s a bunch of properties around you that are in disrepair, it’s going to drive down your property value directly, but then there are also these indirect conduits that we’re also seeing around,” like the loss of community services, public and private disinvestment, and widening insurance gaps on a community-wide basis.

“The consumer is not supposed to be an expert in risk assessment,” says Verisk’s Greenland. “Catastrophe modelers can quantify the risk, but it’s not up to us to align on how to allocate it or handle it.” To his point, Greenland says “there’s nothing that should prevent a bank from using the same flood models that an insurer would, and then telling their borrowers to what extent they need to have this flood insurance,” or any other coverage.

As Fannie Mae and Freddie Mac focus on avoiding climate risk without reducing their business, rumors grow louder about their removal from federal conservatorship. Insurers focus on not taking risks without compensation, while lenders are mortgaging homes and borrowers with the blessing of federal officials watching this crisis approaching.

The impact of underinsurability is “something we think about literally every single day,” says a former chief of staff for the Department of Housing and Urban Development’s (HUD) Office of Housing and Federal Housing Administration (FHA), calling the escalating impact on homeowners “not even as much an ‘if’ anymore. It’s just a ‘when’ because of what we’re seeing in the insurance market and elsewhere.”

“It remains to be seen how much higher will premiums go and at what pace,” they continue, “and we will have to cross that bridge when we get there.”

A climate change-induced market correction is not a distant hypothetical, but already underway. Analysts widely acknowledge that Florida’s state-run insurer of last resort, Citizens Property Insurance Corporation, which the Senate Budget Committee is investigating, and California’s insurer of last resort, the Fair Access to Insurance Requirements (FAIR) plan, teeter on the brink of insolvency. Offering more expensive policies with less coverage, those programs typically protect the riskiest properties that private markets in those states cannot affordably insure.

The number of last-resort policies has skyrocketed in recent years as private insurers have withdrawn or scaled back offerings in those states. Payouts exceeding reserves for either program would trigger state-wide assessments on policyholders estimated to be in the billions-of-dollars range, directly impacting home values and economic stability in those states, as the head of California’s FAIR plan has warned. 

The looming mortgage crisis will be worse than 2008, says Ted Tozer, former president of the government issuer, Ginnie Mae, from 2010 to 2017. “Underinsured foreclosures will dwarf the foreclosures during the housing crisis in low-wealth communities,” says the non-resident fellow at the Urban Institute’s Housing Finance Policy Center and board member for PennyMac Financial Services, a major U.S. correspondent lender and mortgage servicer.

During the last crisis, borrowers who found a way to pay their mortgage did so because their homes were not toxic assets. This time, “if your house is severely damaged or unlivable and you don’t have the ability through insurance and savings to fix your home, you will walk,” Tozer says, highlighting the home-price contagion risks. “There will be fights within city governments on when to condemn properties to minimize blight.”

Florida regulators have sought to alleviate concerns about Citizens’s financial soundness by doubling-down on their safety net’s safety net — taxpayers. Confusing a fail-safe for an escape hatch, President and CEO of Citizens, Tim Cerio, responded to the Senate Budget Committee 2023 inquiry by explaining that Citizens will “levy surcharges on its policyholders and assessments on other Florida insurance consumers until the deficit is eliminated.”

“A big problem with this whole system is a lack of transparency and the availability of data,” says Richard Koss, chief research officer for Recursion, a data analytics provider for mortgage lenders, mortgage-backed security (MBS) investors, and the Mortgage Bankers Association (MBA). In the last mortgage meltdown, “it became clear to investors that they did not have sufficient data to make good judgments during the crisis about trading.”

The Mortgage Bankers Association declined to comment or discuss the concerns raised in this article. An adjunct professor at Columbia University, Koss also served as former director of mortgage market analysis for Fannie Mae from 2009 to 2015, leading capital markets research as the last housing crisis unfolded.

“You’re changing the underlying structure of the system,” Koss explains, highlighting the challenge of even discussing the underinsurability crisis. “There are giant powerful lobbies who are there making sure to protect their interests. How do you deal with that? Like, how bad does the situation have to get?”

“A breakdown in norms” explains why homeowners who became underwater on their mortgages during the Great Recession simply stopped making payments or walked away from properties, says Charles Towe, a professor in the University of Connecticut’s Department of Agriculture & Resource Economics. Towe studied this phenomenon in “The Contagion Effect of Neighboring Foreclosures,” a 2013 study co-authored with Chad Lawley. 

Towe turned his attention to flood risk modeling, the economics of the National Flood Insurance Program (NFIP), which dominates the market for flood insurance, and the impact of flood-risk pricing on insurance uptake over the past decade. Roughly 40% of U.S. homes are owned outright. Those homeowners can insure their assets to the extent they desire — or can afford.

Positing this scenario, Towe describes today’s conditions as almost identical to 2008: “‘Oh, my neighbor Bob, he’s not going to build his property back. Is that a good idea or not a good idea?’ Then you start saying, ‘Well, I owe $250,000 more than my insurance (even if I had it) will pay me back. That’s not worth it. I don’t want to owe $700,000 on a house that’s going to be built back at maybe $450,000.’”

“We’ve seen the existence of neighborhood-level correlations of risk in 2008. Adjacent foreclosures negatively impacted property value,” says Verisk’s Greenland. “You did everything right. You don’t think it’s your risk, but it becomes your problem just from correlation.” These conditions exist in underinsurable communities across the U.S.

“Do you get bought out by the federal government or by the states? Does this mean you need to invoke some new legal options here? Nobody wants to talk about that,” the White House advisor said. “This should have been a day-one priority, and it should be for this incoming administration,” underscoring the national security concerns. 

President-elect Trump’s transition team did not respond to a request for comment on issues raised in this story. The complexity of the housing finance system and the variety of stakeholders wishing to avoid taking on risk has prevented any progress from occurring, despite rising underinsurability being a concern for years. 

“The concern about underinsurance,” says Evan Daniels, Arizona’s former director of Insurance and Financial Institutions, now counsel at Mitchell Sandler, “has been a concern in the regulatory community, on the insurance side, for a long time,” driven by decades of misrepresented risk, regulators’ de facto policy of not enforcing minimum insurance requirements, and consumers’ waning capacity to afford coverage.

After Hurricane Helene devastated Asheville, N.C., once billed as a “climate haven,” in late September, the Federal Reserve Bank of Richmond cited findings from 2017’s Hurricane Harvey showing uninsured properties face much higher default risks. “FEMA leadership has noted, and outside studies have found, that FEMA floodplain maps are outdated. As these maps determine insurance requirements for mortgagors, residents may live in flood-prone regions that are undesignated by FEMA,” the Richmond Fed wrote. Federal Reserve banks are mortgage regulators.

With 70% of current mortgages carrying notes under 4%, most homeowners are locked into the risk presenting as rising annual escrow amounts. Many are already financed to their affordability limit.

“If there’s a disaster and I’m the only one that carries insurance, I will rebuild this house,” says Ivan Petkov, former visiting scholar in the Economics Department at Queens College CUNY, currently an economist at Wayfair. “But, its value is going to plummet because the whole neighborhood is of people that dropped their insurance coverage. That’s actually a pretty big risk for any lender.”

Petkov co-authored the May 2024 study, “To Improve Is to Change? The Effects of Risk Rating 2.0 on Flood Insurance Demand,” discovering that pricing asset-level risk accurately directly escalates underinsurability because Risk Rating 2.0 has caused many homeowners to hit their affordability limit. Flooding is the nation’s costliest hazard to insure and the only peril that has been systematically reported. 

Changes made in 2021 to the way NFIP policies are priced (“Risk Rating 2.0”) have caused the program to hemorrhage customers, accelerating flood underinsurance nationwide. Decades of misrepresented risk and political paralysis around NFIP reform mean accurately pricing flood risk now costs more — but saying so remains politically toxic, even if it better protects homeowners. The problem is, now, many homeowners cannot afford it.

“There is a role for the federal government here, very much so, but it has to be invoked, and people are scared of touching the sleeping bear,” the White House advisor explains. “The sleeping bear is state oversight of P&C markets.” Few want the federal government involved in this issue, but most expect the federal bailout. 

“There’s a positive correlation between event severity and the expectation of federal level support,” Greenland explains. Markets are banking on the federal bailout, functioning with the implicit understanding that banks will not have to bear the tail risk of any major event — reneging on their “moral hazard risk,” which bred the Dodd-Frank Act’s “too big to fail” designation after the meltdown in 2008.

“I’ve been inside the administration, shouting from the rooftops about this issue,” the White House advisor says. “We were just able to kind of get it on the radar, and then we lost the election.”

As more than 100 climate change-denying Republican lawmakers prepare to control Congress and the Senate in January, the issue risks losing momentum — or worse, backsliding. Data collection efforts initiated in 2021 by the Federal Insurance Office (FIO) to address this crisis have been stymied by insurance carriers and state regulators.

CoreLogic’s Carroll calls himself “a bit more sanguine” on the political mismatch stalling progress on addressing these issues. “You’d be surprised how much bipartisan alignment you can get,” he says. “At the end of the day, no member of Congress wants to see their constituents harmed.” The actions of elected officials suggest otherwise.

Attorneys general from Louisiana, Florida, Idaho, Kentucky, Mississippi, Montana, North Dakota, South Carolina, Texas, and Virginia sued the federal government in June 2023, contending that the NFIP’s new pricing mechanism, Risk Rating 2.0 (RR2.0) imposes a financial burden on residents that will force people to leave at-risk areas, increasing foreclosures and exacerbating economic decline in those areas. That reality is around the corner, anyway. 

Faced with the dissonance of politicians’ stated goals and their inaction on these issues, Carroll adds, “I truly don’t think that it’s something that’s going to just go away in the next four years.”

“At some point I was told by someone, ‘Stay out of it. We don’t want to touch this,’” the White House advisor says. “At another point I was told, ‘We’re overstepping. Let the states handle it.’ Like, all kinds of excuses.”

Reiterating that “it would be both politically and economically unfeasible for Citizens to attempt to recoup tens of billions of dollars in losses from Florida policyholders,” the Budget Committee renewed its inquiry into Florida’s insurer of last resort in March 2024 after Governor Ron DeSantis said on CNBC that Citizens “is not solvent.”

Jimmy Patronis, Florida’s chief financial officer through the state’s Department of Financial Services, responded to the Budget Committee’s renewed request with his own records request, stalling the investigation by urging the committee to instead investigate its lame-duck chair, Democratic Senator from Rhode Island Sheldon Whitehouse, “for potential conflicts of interest connected to his wife, Sandra Whitehouse’s consulting business.”

Although billion-dollar disasters are accreting annually — 28 in 2023, 24 in 2024 — community insurance uptake increasingly becomes a function of affordability, not the likelihood of loss. Millions of federally guaranteed mortgages have been originated since early 2020, since which time median national U.S. home prices have risen 50%. Average monthly home insurance payments have risen 52%, per the Intercontinental Exchange, Inc. (ICE).

“Federal lending is regulated at the federal level. Insurance is 100% done at the state level. There’s some grouping of states that work together, but the federal government has no authority, and has very little specific impact at the state level,” says George Gallagher, senior leader and principal at CoreLogic. “That’s the biggest problem.”

And now, the next mechanism for pricing climate change into housing is underway — shifting a legacy of unpriced, asset-level risks onto the homeowners and home buyers already carrying the housing market’s dirty water. 

Third-party data providers and risk assessment firms like First Street, Verisk, and CoreLogic have undertaken the gargantuan task of re-risking every U.S. home based on those homes’ and communities’ resilience to escalating climate change. Marketed under the banner of transparency, this process is anything but, and carries direct implications beyond home valuations — for instance, which elementary schools and hospitals are closed, which zoos are emptied, which retailers and grocery stores leave an area.

“There’s a whole bunch of consumer protection issues here,” the White House advisor says.

Not just hurricanes in Florida or wildfires in California, but increasingly frequent and severe weather occurring across the country presents the greatest challenge in pricing asset-level risks defining where “managed retreats” and disinvestment is necessary. Harkening to redlining, the homes and communities to be avoided are being identified. 

“There will be the communities that are impacted,” says CoreLogic’s Gallagher, “but I think they are, if I could be bold enough to say, they’re relatively identifiable. Entities that are using our products are looking for those concentrations of risks, because now to expand it beyond the insurer, this becomes really a community-based issue.” 

The winners and losers of the looming mortgage crisis are being selected by those with access to this kind of market intelligence. Government housing agencies are actively engaged in this process of picking and choosing. Buyers in these “relatively identifiable” markets do not know the mortgages or properties they are buying are so risky.

“Without the models, you don’t have this insight,” Verisk’s Greenland explained on a recent episode of a housing finance podcast co-hosted by mortgage pundit Rob Chrisman and Rich Swerbinsky, founder of Onward & Upward Consulting. 

Insurers, investors, lenders, and federal agencies are asking, “Do I have properties where I have high loan-to-value and low debt-service-coverage and I find myself in a potentially stressed zone?” he posits, describing the perspective of those who see home finance as an asset class, first. “I shouldn’t pay the same amount for that loan.”

Homes proximal to wildfire or flood zones that cannot secure affordable coverage, “that new buyer is going to come in at a rate much lower just to make up for the difference between the two,” Gallagaher says. “Communities are going to start seeing some of that. Many already have,” he adds, “the rug being pulled out from underneath you.”

Lenders, investors, and government agencies that partner with firms like Verisk or CoreLogic do so to access the view of natural catastrophe risk and underinsurability that insurers use to set premiums, and use that data to assess climate-adjusted loan-to-value (LTV) ratios or stress test their own portfolios.

“Not all models are created equal,” says PwC’s Bochanski. “If you had First Street, PwC, and CoreLogic, and you put our climate models for the same peril side-by-side, they may yield very different results. There’s good reason for that in terms of methodology and data sources and all that stuff. But, I think some of that can be lost on consumers.”

“Any firm that tells you they can confidently predict flood risk at a property level isn’t being fully truthful,” says Cliff Rossi, a mortgage and insurance expert who has held senior roles at the U.S. Treasury, Fannie Mae, Freddie Mac, Citigroup, Washington Mutual, Countrywide Bank, and Radian Guaranty. “Or, are we all OK with huge model risk that no one can validate except within these vendors?”

In September, Zillow and First Street announced a partnership resulting in every for-sale listing on Zillow receiving a detailed climate risk score covering five key categories — flood, wildfire, wind, heat, and air quality — complete with risk scores, interactive maps, and insurance requirements and recommendations. Redfin and First Street signed the same deal several years ago. The algorithms and underlying data are proprietary to First Street.

“Saying individual homes face the same risk is misleading,” says Jeremy Crawford, President and CEO of First Multiple Listing Service (FMLS), the fourth-largest MLS, covering much of the southeastern U.S. A wind, flood, or wildfire score often only reflects risk at the county level, not the property level. The rating scores, algorithms generating those scores, and underlying data originate with a third-party provider, such as First Street or CoreLogic.

“There is not an opt in, opt out option for homeowners,” Porter says. “The goal is to make the data available to everyone and for every property in the U.S. so that individuals can make the smartest decisions in the home buying and home protection process.” Climate scores are “similar to other features that are on the sites like walkability, nearby school quality, noise levels,” another data point central to a home buyer’s purchasing decision.

Lock-in effects entail that most resale inventory in coming years will have a climate risk-rating score that was never part of the pricing conversation when homeowners bought their current homes — or buy one today. What are the implications for Zillow Home Loans and Bay Equity Home Loans, the respective mortgage lending arms of the dominant digital real estate brokerages, Zillow and Redfin?

Third-party providers of climate-adjusted, property-level natural hazard risk “all use various techniques to take very coarse spatial resolution down to the address level, and even then, their choice of digital elevation maps and models influences getting an accurate read on the property,” Rossi explains. “Without any transparency into their methodologies, which they hold closely, they could have an enormous impact on re-risking the housing market.”

Crawford was an early employee at MarketLinx, today known as CoreLogic, and says buyers in 2025 “should all be thinking about cost of ownership” in the context of the climate data available. 

“These vendors need to be very careful about such things,”warns Rossi. “I could see all sorts of litigation in the future brought by homeowners claiming these companies harmed their values based on faulty and unregulated models.” The lack of any standardized criteria for consumers to comprehend or communicate these scores raise concerns about fair lending, deceptive marketing, and consumer privacy, as a start.

As part of President Biden’s May 2021 Executive Order 14030, Ginnie Mae, HUD’s issuer of FHA-insured loans, the FHFA, the USDA, VA, and the White House Office of Management and Budget (OMB) studied the climate-related financial risks in each agency’s single-family guaranteed housing programs.

“Why has there been no material support following the insurance convenings that the FHFA sponsored with Fannie and Freddie,” the White House advisor asks. The FHFA, HUD, FHA, Fannie Mae, and Freddie Mac declined multiple invitations to address myriad concerns raised in this article.

“We don’t have the framework in place yet to start really getting those questions asked and answered,” says CoreLogic’s Carroll. “We need to see somebody step up to get a robust public-private dialogue going to start asking and answering the right questions to understand really just how exposed is the system, are investors, are homeowners, so that we don’t see a repeat of what happened in 2008.”

“We have the federal government bailing out really bad decisions made by states,” the White House advisor levels. “Should I be paying my hard-earned money to bail out a state that won’t do their part to reduce risk?”