06 Nov Banks are Unloading Mortgages at Taxpayer’s Expense
A paper published in September states that if banks continue to exploit the climate-change epidemic by using it to make more money with the method of buying and selling high risk disaster mortgages to taxpayer- support entities. This will possibly cause a repeat of the 2008 financial crisis.
An academic paper says that since 2006, the total number of policies for flood insurance have decreased dramatically, which is causing a trend of coastal properties to be more likely to have an increase of default mortgages. Two of the Largest U.S. Commercial mortgage lenders do have the option to set the price for flood risk and because of that they can securitize some of the loans, meaning spreading the risk out to multiple parties.
Fannie Mae and Freddie Mac are tax supported government control, mortgaged guarantors and are buying mortgage loans from banks who are exploiting flooding risks and climate change, this is a more common way that the banks make money. Fannie and Freddie’s main goal is to expand home-ownership, thus taking everything, they can get their hands on. This includes taking mortgages in disaster-risk flood zones and pricing them the same way commercial banks can.
Without change the mispricing keeps climbing, with having $60 – $100 billion for just new coastal homes mortgages each year.
Amine Ouazad, a professor at HEC Montreal in the apartment of applied economics, and Matthew Kahn, also a professor at John Hopkins University, conclude that their findings display that the stability of the financial institution is threatened.
That throws it back to the beginning of the post 2008 lending crisis. The small upside is, 10 years ago in the housing crisis there were more risky subprime mortgages then the climate change linked mortgages in the pool. To contradict the good side though floods, wind, and storms could damage properties forever, which means that there is no physical asset that is backed up by these lost mortgages.
Dean Becketti chief economist at Freddie Mac wrote in 2016 that the social disturbance and economic losses are greater for the rising sea levels for coastal housing versus the total experienced in the Great Recession and the housing crisis. He continued that its very unlikely that the barrowers will carry on paying their mortgage payments with their house submerged in water.
Between 2004 and 2012 the paper published in September studied the habits of the mortgage lenders, and there was at the least $1 billion dollars in damages. After the hurricanes, lenders increased costal mortgages by about 10% a share that was discharged to Freddie and Fannie.
Researchers concluded that the chance of a potential foreclosure will increase by 3.6% after the first hurricane that year and by 4.6% for the mortgage after the third year.
Some market will be better suited and prepared for the rising climates then others; researchers shine light on that there also different risks for banks. Meaning uneven prepayment risk is going to eventually cost the banks money, which is a big element also.
The researcher’s findings where not address by the Mortgage Banker Association and did not respond to a request for a comment.
As Claimed by Kahn and Ouazad the biggest upset is that there has been little motive to adopt a new process to making borrowing for home-ownership more challenging. It’s a large part because Americans link status and wealth to home ownership. 27.5 trillion in value of capital has been provided by government-sponsored and lenders to householders biding and buying place-based wealth. With 10.9 trillion in debt as of the first quarter this year. Adding their liquidity in such a big mortgage pool, Fannie and Freddie make is critical for possible the known 30-year, fixed mortgage rate.
There is about three times the amount of people who are concerned about climate change-triggered flooding that originally thought by researchers in October. It’s not because there is more water on the earth It’s because of the developing Asia and other developing is several feet below sea level, which is a high-risk area.
Climate-linked risk data is becoming more valuable and companies are paying startups to industries, the are measuring everything between carbon emissions to sea-level rising and extreme heat. Some of the known players are Four Twenty Seven Inc,., was cultivated be a credit rating firm Moody’s, and Jupiter, which generate fire, flood, heat, cold, wind, fire, and hail events and convert them into risk modeling for real-estate assets.
Ouazad and Kahn paper suggests that arm of the home-buying-and-selling industry may be changing with the times. But has a worrisome lag, as it lies with the multi-trillion-dollar lending market and an expansion of explosion of Fannie and Freddie.