Managing Risk for the (Inevitable) Next Disaster

LOS ANGELES–Floods; hurricanes; tornados; wildfires; earthquakes; droughts; volcanoes; ice storms; blizzards. Just another day in America.

HowardBottsFor Howard Botts, Chief Scientist with CoreLogic, Irvine, Calif., natural disasters mean more. He notes as the country’s population grows (now at 323 million), they are moving to places deemed more vulnerable to natural disasters, which in turn dramatically increases risk to mortgage lenders, servicers and insurers.

Speaking here at the Mortgage Bankers Association’s Risk Management, Quality Assurance and Fraud Prevention Forum, Botts said as more and more Americans willingly move to disaster-prone regions–such as coastal areas, despite long-term forecasts showing sea levels could rise by as much as three feet over the next generation–they increase risks for the housing finance industry.

“People love living on barrier islands,” Botts said. “They have a great ocean view. But they’re also right in the path of hurricanes. This is greatly increasing companies’ risk profile. We’re going to see more climate impact changes on your portfolios. If you own beachfront property, you might want to consider selling.”

Botts said the industry is “just starting” to appreciate the full impact of flooding, noting while recent hurricanes, such as 2017’s Harvey and Irma and this year’s Florence, have increased the flood profile, inland river flooding is just as frequent, if not as high-profile.

“We spend a lot of time looking at the sources of disaster for a particular property,” Botts said. And for the most part, he added, “most properties have coverage gaps” that can dramatically increase liability and loss. This has a significant impact on delinquencies and foreclosures, particularly for those home that are outside the 100-year flood event map.”

Adding to the problem, Botts added, is that “most people think they’re covered, when in reality, they’re not.” A review of damage from Harvey, he noted, was that so much of the damage came from its slow-moving path, which exacerbated the amount of wind and rain that hit particular areas of Texas.

Post-Harvey, CoreLogic found interesting results in delinquencies and foreclosures. For homes with high FICO scores and low loan-to-value ratios, the 90-day delinquency rate was just 0.3 percent; for homes with low FICO scores and higher LTVs, the rate jumped to nearly 10 percent.

Less frequent, but just as potentially devastating, is the potential for earthquakes-something of which Botts, a Southern California resident, is acutely aware.

“There’s a 99.7 percent chance Southern California will have a major earthquake in the next 30 years,” Botts said. “Buildings in downtown California are designed to sway up to 15 to 20 feet in an earthquake. Let’s hope they all move the same way,” he quipped.

Botts noted only 12 percent of Californians have earthquake insurance. “When the next earthquake hits–and it will–this is going to have potentially huge ramifications,” he said.