Reducing Lender Risk From Climate Disasters


Natural disasters continue to wreak havoc, causing enormous human and economic losses. During 2022 alone, there were 18 weather- and climate-related disasters recorded in the United States, resulting in approximately $171.5 billion in damage, according to the National Centers for Environmental Information.

It is expected that weather-related disasters will continue growing in frequency, scale and intensity.

Impacts on the Mortgage Industry

Since natural disasters affect the collateral used to support loans, the mortgage industry is almost always impacted. Lenders, servicers and investors have a lot at stake when it comes to these disasters, with the potential for significant revenue loss, increased costs and diminished asset value.

Lender Challenges

When a disaster strikes, lenders may need to postpone loan closings, resulting in reduced origination income. Depending on the size and type of lender, the lost income could impair its ability to fund new loans. Additionally, already-funded loans may be difficult to sell, further limiting lender liquidity.

Servicer Challenges

Servicers need to inspect properties located in FEMA-declared disaster areas, which can be costly. Prepayments and forbearance plans may increase, leading to liquidity strains. As housing prices drop in affected areas, homeowners may opt for short sales. And, as defaults will likely increase, so will the cost to service those loans.

Of course, investors also experience substantial losses when loans in their portfolios foreclose or prepay.

How to Effectively Reduce Risk

According to a recent report by the Mortgage Bankers Association Research Institute for Housing America, lenders and investors have a hard time gauging and mitigating climate-related risk. The good news is mortgage professionals can start managing their risk and financial exposure today with proactive planning.

To effectively reduce these risks, however, the complete cycle of weather-related events should be managed, including identifying pipeline and portfolio risk before a disaster occurs, effectively allocating resources during the event, and assessing the situation afterward. Fortunately, technology, data and analytics exist today to assist with all that.

Before a Disaster

Lenders and servicers need data that enables them to assess future risk at the property level and throughout the term of a mortgage. This data could be used in their loss models to help ascertain overall portfolio risk.

Armed with better natural-disaster risk forecasts at the property and portfolio level, mortgage professionals could offset future losses by incorporating this additional intelligence into their hedging strategies and improve the balance between higher- and lower-risk loans within a portfolio. They could also include climate risk scoring in loss-reserving decisions and loan product development to further strengthen their position when a natural disaster strikes.

Climate risk scoring enables users to search by such attributes as address, APN, latitude and longitude, ZIP or census tract. This is an important capability since weather-related risk can extend to the surrounding areas and infrastructure that impact properties and resulting valuations. In addition, since the risk of weather-related natural disasters continually changes, the solution is updated with the latest data available.

During a Disaster

During a natural disaster, it’s critical that lenders and servicers contact affected homeowners to provide relevant assistance and communication. FEMA data is typically used to determine which properties may be impacted. However, relying on this data alone can put mortgage participants and their borrowers at a disadvantage, since FEMA information lags by days or weeks.

Additionally, FEMA uses county boundaries for its “disaster area” designations, but natural disasters do not affect all properties within those boundaries. This can hinder an organization’s ability to allocate resources in a way that benefits homeowners who have been impacted.

Mortgage-industry stakeholders need more precise disaster intelligence, as well as faster ways to receive the information, so they can quickly and accurately pinpoint properties that have been impacted by a natural disaster.

Disaster alerts can provide property-level insight into natural disasters as they occur. These alerts leverage numerous sources to drill down into impacted areas and pinpoint affected properties. As a disaster unfolds, alerts are updated in near-real-time so organizations can more quickly pivot as needed.

After a Disaster

Since natural disasters often lead to increased default rates, short sales, foreclosures and prepayments, mortgage professionals need ways to efficiently and cost-effectively monitor properties for these activities after an event. Data can be used to gain important and actionable insights for activities that signal increased property risk in the area.  

For example, tax delinquency, bankruptcy alerts and/or involuntary lien data can be early signs of default activity. Listing data could indicate a short sale and valuation data could show potentially worsening conditions.

It’s Not a Matter of if – But When

While no one knows exactly when the next destructive climate and weather-related disaster will strike, it’s not a matter of if – but when. The detrimental impact of natural disasters on life and property can be immense, with the potential for damages well into the billions of dollars. And the risk they represent to those with a financial stake in the collateral affected is significant and growing.

Fortunately, mortgage lenders, servicers and investors have access to data and analytics that can help them proactively prepare for the next natural disaster, better manage risk and more effectively help the borrowers who need it most.

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