That’s the question posed by CNBC. It holds profound implications for the mortgage financial sector.
New estimates suggest as many as 300,000 borrowers could become delinquent on their loans and 160,000 could become seriously delinquent, that is, more than 90 days past due, when banks initiate foreclosure proceedings … That is four times the original prediction because new disaster zones were designated and more homes flooded when officials released water from reservoirs to protect dams. The total number of mortgaged properties in disaster zones is 1.18 million. Houston disaster zones contain twice as many mortgaged properties than Katrina zones, with four times the unpaid principal balance.
After Hurricane Katrina, mortgage delinquencies in Louisiana and Mississippi disaster areas spiked 25 percentage points. The same could happen in Houston, as borrowers without flood insurance weigh their options. They will get some federal relief, but if rebuilding would cost more than the principal in their homes, they could decide to walk away.
There’s more at the link.
Zero Hedge adds:
Combining the preliminary estimates for both Harvey and Irma suggests that over 3.3 million total mortgaged properties are located in Irma and Harvey-related FEMA Disaster zones, while the dollar amount of total unpaid mortgage balances in these two zones is massive: between Irma’s $517 billion and Harvey’s $179 billion, the total potential damage could impact as much as a $696 billion in notional mortgage values, which banks could be on the hook for if current occupiers decide to simply walk away.
Again, more at the link.
This highlights an anomaly in US mortgage finance law, one that does not exist in most of the rest of the world. In several US states, a mortgage is classified as so-called ‘non-recourse debt‘; i.e. it’s secured only by the property against which it is granted. If the mortgage holder defaults, the property may be seized and sold to pay off as much as possible of the mortgage bond, but the holder’s other assets may not be seized in the same way, and the holder may not be sued for the balance (if any) of what was originally owed. In other states, there is a right of recourse, but it may be more or less limited according to local law.
This issue exposes the mortgage holder to much greater risk when it comes to hurricane-damaged properties. If the homeowner discovers that his insurance payout is much less than the present value of his home, and/or much less than what it will cost to repair his home, and if the mortgage holder’s recourse is limited, he may simply decide to walk away from it, cease paying the mortgage, and let the mortgage holder deal with the problem.
I posed this question after Hurricane Katrina, when I wrote:
What about mortgages on properties that are now underwater? The occupants can’t and won’t pay, but the mortgage holders will demand payment. We could end up with massive foreclosures on property that is worthless, leaving a lot of folks neck-deep in debt and without homes (even damaged ones).
The problem is likely to be much worse after Hurricanes Harvey and Irma, which affected a much larger area between them. To make matters worse, more storms are already active in the North Atlantic Ocean, and may potentially strike this country.
This problem, in turn, means many financial institutions may have to take a long, hard look at whether or not it’s still profitable to grant mortgages in areas vulnerable to such natural disasters. If they can’t adequately protect their investments by insurance or other means, then is it still worth making them? That may affect potential homeowners in those areas for much longer than the hurricane damage will take to repair. Some sort of state guarantees may be necessary to persuade financial institutions to continue to finance home construction and purchases – yet another burden on already over-extended state budgets, and on taxpayers.