Facing A Rising Tide Of Disasters

Over the past several years, natural disasters ranging from wildfires and hurricanes to tornadoes and floods have been increasing in frequency and severity. Unlike economic shifts or downturns in the housing market, which can be somewhat anticipated, most of these catastrophes—like the COVID-19 pandemic—strike with little or no warning. Their impact is often devastating. 

The U.S. experienced 28 weather-related disasters in 2023 that caused at least $1 billion in damage, according to the National Oceanic and Atmospheric Administration (NOAA). More than 2.5 million Americans were forced from their homes as a result of these storms, with more than one third displaced for longer than a month. Florida, Texas, California, and Louisiana were among the hardest hit states. Each saw hundreds of thousands of residents fleeing their homes.

Each year that passes the risk from natural disasters looms larger than the last. According to Realtor.com’s recent Housing and Climate Risk Report, nearly 45% of U.S. homes will be at risk from flooding, wind events, wildfire, extreme heat, and poor air quality in 2024. For servicers, a single disaster can trigger a deluge of requests from affected homeowners seeking relief and support. However, very few servicers are prepared to allocate resources quickly and effectively, let alone prepared to handle a deluge of requests for assistance promptly and compassionately.

While the operational risks for mortgage servicers seem obvious, the spike in weather-related events is happening at a particularly precarious time. 

Over the past several months, servicers have experienced a noticeable uptick in defaults and foreclosures due in part to the ending of pandemic-related relief programs, rising interest rates, and lingering inflation. According to the Mortgage Banking Association’s (MBA) most recent National Delinquency Survey, the delinquency rate rose 26 basis points between the third and fourth quarters of 2023. The FHA delinquency rate increased by a concerning 131 basis points. 

Though these rates remain relatively low, the figures suggest many first-time homebuyers are having trouble meeting their mortgage obligations while dealing with rising debt and a steady increase in the cost of living – and there’s another trend in the numbers that’s equally troubling. 

Disastrous Payment Increases

The growing number of fires, hurricanes, and floods aren’t just hurting homeowners who find themselves – and their homes – directly in disaster’s path. Increasing damage from disasters causes a cascading effect on all homeowners in the form of rising insurance premiums. 

As a result, almost every borrower is facing significantly higher monthly mortgage payments, which is likely to push default rates even higher. 

In 2022, insurance companies paid out $99 billion in claims related to natural disasters that occurred in 2022, according to a study by Policygenius, an online insurance marketplace. The study also found that insurance premiums rose by an average of 21% from between mid-2022 and mid-2023, compared to a 12% increase during the prior year. In some states, rates increased as much as 35% annually. According to some reports, homeowners have seen tax and insurance costs eclipse the principal and interest portion of their mortgage payment. 

Some insurers have stopped writing new policies in states like Florida and California that have been among the hardest hit by disasters. While those states’ regulators are taking action to keep insurance options open to homeowners, this trend signals a paradigm shift in the housing market that carries significant implications for mortgage servicers. Though, for now, climate change cannot be halted, the growing impact on homeowners and servicers can be mitigated.

For servicers, acknowledging the evolving dynamics of extreme weather includes expecting the unexpected. However, it’s equally important to adopt technologies, new processes, and new mentalities that enhance operational capacity to handle loss mitigation and workout assistance that supports borrowers through financial hardships and disaster-related disruptions. 

Putting The Right Pieces In Place

The first step is optimizing self-service and frontline loss mitigation processes. This could begin with a thorough review of current policies, restructuring them where necessary to ensure borrowers receive relief options in a timely manner. For most servicers, the key to restructuring lies in workflow automation, rapid accessibility, and technology-powered results. 

Today’s automated workflow technology enables lenders and servicers to expedite data collection, verification, and processing so they can respond to borrowers’ needs with greater speed and flexibility. These technologies arm organizations with an assortment of processes that enable them to address the unpredictable—whether a severe weather event or the need to implement ever-changing loss mitigation regulations and guidelines. 

Automating routine tasks and leveraging document generation, OCR/AI advancements, case management, and mobile borrower interactions also enhances bulk processing of like requests and the identification of complexities, which not only reduces costs but minimizes errors, shortcuts, and workarounds that arise during disasters and periods of rising defaults. 

Adopting these efficiencies enables servicers to more rapidly identify borrowers affected by natural disasters, facilitating engagement with borrowers and thereby expediting workout processes, helping to manage spikes in defaults. Coupled with system- and human-generated communications that provide borrowers with education and solutions, automated workflows empower servicers to better allocate their human resources for exceptional problem solving and personalized assistance where most needed.

Restructuring creates clear benefits to borrowers, such as the ability to leverage user-friendly online portals for submitting and tracking the status of their requests and guided processes for what “next steps” may be. Creating transparency between borrowers and servicers becomes more important as the likelihood of financial hardship for borrowers grows.

Flexibility is part-and-parcel of what a servicer’s “preparedness” requires now. Flexibility and automation are not mutually exclusive. We can do very little to interrupt the surge in extreme weather-related disasters and their direct and indirect impacts, but servicers are uniquely positioned to mitigate the financial aftershocks and the growing risk of default that follows. The resilience borrowers and lenders need hinges on servicers’ ability to adapt to the unexpected.