Insurance Crisis Hits Lenders' Bottom Lines
While monthly principal, interest, and property tax obligations are up an average 15-17% since the beginning of 2020, the average monthly property insurance payment is up a staggering 52% over that same period.
Editor's Note: National Mortgage Professional contributing writer Lew Sichelman is onsite at this week's Mortgage Bankers Association annual conference in Denver. This is one of a series of reports from the event, exclusively for NMP.
How bad is the insurance crisis? Bad and getting worse. And not just because storms are more frequent and more severe, according to a panel on weathering the crisis at the Mortgage Bankers Association's (MBA) annual convention yesterday.
One of the major drivers is the great migration of people to warm, amenity-rich metropolitan areas, said CoreLogic’s Peter Carroll. Those, he said, just happen to be the most climate-risky regions of the country. Spots like Florida’s Southwest Coast, which has been hit by two major hurricanes in the last month or so.
Although there has been some evidence that folks are moving out of the Sunshine State to somewhat safer environs, the cost of insurance and property taxes is starting to eclipse the principal and interest portion of the typical home owner’s monthly house payment. And not just in Florida.
According to Intercontinental Exchange, Inc.'s (ICE) October Mortgage Monitor, while monthly principal, interest, and property tax obligations are up an average 15-17% since the beginning of 2020, the average monthly property insurance payment is up a staggering 52% over that same period.
ICE also noted that while monthly PITI is lower among more seasoned loans, a significant portion of each payment – 35% – goes toward taxes and insurance, variable costs which can continue to rise, even if principal and interest are fixed.
In New Orleans as well as some Florida markets, monthly property insurance payments increased by more than 80%.
When there’s a major weather event, it hurts. Not only insurers and homeowners but loan servicers, too, according to Donald White of PennyMac Financial Services, one of three panelists at the MBA session.
Pennymac administers about 5,000 mortgages where Hurricanes Helene and Milton tore through Florida, and 4,000 of those are now in some form of forbearance, White reported, noting that it costs the company about 13 times more to service those loans than mortgages that are up-to-date.
“It hits our bottom line pretty directly,” he said.
In the past five years, the average insurance premium for loans in Pennymac’s entire portfolio has gone up by 50%. But in the last 12 months alone, the premium has gone up an average of 13%.
The “massive increase in premiums is always higher than inflation,” White told the session.
According to ICE’s forthcoming November Mortgage Monitor, which was previewed for NMP at the convention, 11% of all mortgaged properties – 6.1 million – were in the path of the three big hurricanes so far this year. Some 4.9 million alone were in the path of two Florida hurricanes.
In Asheville, N.C., which was struck particularly hard by Helene, normally 2% percent of all mortgages wouldn't have been paid by the 15th of the month. ICE’s November report found that in October, the share had more than doubled to 5%.
Pennymac's White said lenders, investors, and servicers are dependent on a healthy insurance market. But A.M. Best and Standards & Poors have both recently downgraded personal insurance business.
Ethan Aumann of the American Property Casualty Insurance Association, the main trade organization for the casualty insurance industry, said that normally, property coverage “is only a small part” of overall cost of home ownership. But in recent years, the fallout on insurers has been severe.
Most recently, Aumann said, his members have been paying out $1.10 for every $1 of premiums paid. “Premiums haven’t kept up,” he said, noting that so far this year, 24 weather events have resulted in $1 billion or more in losses per event. And that’s on top of 28 such storms last year.
Aumann laid much of the blame for that on state insurance commissions. It can take a year in some cases after companies file for rate increases for the changes to be approved, he said, and six months more to put the increases into place. “Insurance premiums always lag the economy,” he said.
The trade group executive said localities need to allow insurers to more accurately price risk and adjust their rates accordingly.
Aumann also called for “better” financial literacy on how insurance works. There needs to be a better understanding of how rising construction costs impact premiums, he added, and lenders need to do a better job telling new borrowers that although the principal and interest portions of their monthly payments won’t change, the amounts that go to taxes and insurance certainly will.
CoreLogic’s Carroll told the session that companies like his are getting a better handle on the probability of extreme events and what it will cost to replace or repair damaged properties. And that, he said, should drive down risk scores so premiums can be based more on loss possibilities.
Anticipating an increasingly unstable future, the panelists called for infrastructure improvements, stronger building codes and land use policies, and funding science-based research. White mentioned treating wood structures to make them fire resistant, and Aumann went so far as to suggest tax-free savings accounts to help more vulnerable residents put money away to cover their share of rebuilding costs.
But White summed it up this way: “At the heart of the problem is climate risk. Even if we get the current dilemma fixed, we still have the chronic issue of climate change.”