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From Disaster to Delinquency?

The U.S. has seen notable natural disasters over the past year. Last fall, major hurricanes hit Florida, Texas, and Puerto Rico, causing wind damage and major flooding. Wildfires raged in California last winter, and new wildfires rage in the state now. Hawaii witnessed major volcanic eruptions recently. States like Massachusetts and West Virginia experienced weather-related disasters, ranging from winter storm damage to mudslides.

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Natural Disasters Cause Financial Disruption
Natural disasters not only bring danger to life and limb, they also bring financial disruption to people living in their path.
  • Businesses can be damaged, leading to job furloughs or even job loss.
  • Residences can be damaged. If the buildings are damaged seriously, the people that call the buildings home may have to move, either temporarily or permanently.
  • People who are injured by the effects of natural disasters may be unable to work even if their place of employment isn’t damaged.

All three of these disruptions can lead to mortgage delinquencies. If people are not receiving income other than emergency relief, they may become unable to pay their mortgage. If homes have been damaged, mortgage-holders may want to wait for a damage assessment. During that period of time or while waiting for insurance or Federal disaster funds payments, mortgage-holders may become delinquent.

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Mortgage Delinquencies Higher in Disaster Areas

Because of financial and other disruptions, mortgage delinquencies go up predictably after natural disasters. According to CoreLogic, a real estate analytics firm, serious mortgage delinquencies — defined as 90 days or more past due — are three times higher in places like Houston, Texas, and Naples, Florida than they were before hurricanes devastated both those areas.

In Puerto Rico, serious mortgage delinquencies are four times higher than they were before the hurricane that hit the island.

Delinquencies that are 30 or more days past due are rising as well. In Houston, roughly 6,700 new 30-day delinquent mortgages were reported in the wake of Hurricane Harvey.

In the U.S. overall, CoreLogic indicates that almost 5% of mortgages are 30 or more days past due.

However, the rate of delinquencies in areas not affected by natural disasters in the U.S. has been dropping steadily. The low unemployment rate and strong economy means that people are, on the whole, not becoming delinquent — unless they are in the path of a natural disaster.

State by state, only Florida and Texas saw serious delinquency rates rise. In Alaska and North Dakota, they stayed the same. In the other 46 states, serious delinquency rates dropped.

In hard-hit areas, transition rates are also rising. Transition rates show the number of mortgages going from 30 or more days past due to 90 or more days past due, and from 90 or more days to longer terms delinquent.

What does the future hold for delinquencies? Natural disasters aren’t entirely predictable, of course, but weather services do try. CoreLogic examined the forecasts from the U.S. National Oceanic and Atmospheric Administration (NOAC) and estimated that up to 7 million residences are at risk of hurricane-related storm surges in the upcoming hurricane season.

Now, not all storm surges cause delinquencies and not all hurricanes make landfall. But the possibility is there.

Financial Institutions May Need to Rebalance Portfolios

A natural disaster-related rise in mortgage delinquencies is fairly predictable. Because it is, financial institutions should consider managing their assets to account for the likelihood of natural disasters in their areas. Buying or selling mortgage portfolios can be a prudent solution to a possible rise in delinquencies and to a reduction in delinquencies as natural disaster-related situations are unwound.