A new report by Freddie Mac says that a large share of U.S. homeowners’ wealth in tied up in their equity in their homes. The report also claims that if those homes become uninsurable and unmarketable, home values would drop drastically and could end up being worthless.
A housing market where possibly in the near future homes would be worth zero dollars and there would never be a recovery like we have seen over that last several years since the last housing crash of 2008.
In the housing crisis, a significant share of borrowers continued to make their mortgage payments even though the values of their homes were less than the balances of their mortgages. It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater. As a result, lenders, servicers and mortgage insurers are likely to suffer large losses, according to the Freddie Mac monthly Insight for April.
With a focus on the flood challenges the industry faces, the current system in the United States for dealing with flood risk, and some questions that will have to be addressed if climate change raises sea levels significantly.
Sean Becketti, Chief Economist at Freddie Mac had issued this statement along with the report:
“One challenge for housing economists is predicting the time path of house prices in areas likely to be impacted by climate change. Consider an expensive beachfront house that is highly likely to be submerged eventually, although ‘eventually’ is difficult to pin down and may be a long way off. Will the value of the house decline gradually as the expected life of the house becomes shorter? Or, alternatively, will the value of the house — and all the houses around it — plunge the first time a lender refuses to make a mortgage on a nearby house or an insurer refuses to issue a homeowner’s policy? Or will the trigger be one or two homeowners who decide to sell defensively?”
“Currently, under federal law, flood insurance is mandatory for all federal or federally-related financial assistance for the acquisition and/or construction of buildings in Special Flood Hazard Areas (SFHAs). In addition, Freddie Mac requires flood insurance before it will purchase a loan for a property in an SFHA. As the market shakes out in the affected areas some residents will cash out early and suffer minimal losses. Others will not be so lucky. And newcomers may appear, finally able to live out their dreams of living at the seashore, if only for a short time.”