Natural Disasters are now Measurable Default Risks

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Growing
numbers of severe weather events throughout the U.S. may be giving new meaning
to “location, location, location” in the housing world.  CoreLogic senior economist Kathryn Dobbyn
writes in the company’s blog “housing Pulse” that the $8 billion in property
damage caused by severe weather in the U.S. in 2013 is causing the housing
industry to think about the risk of any given location’s exposure to natural
disasters which are only expected to
continue to increase in both frequency and intensity.

In some parts of the country, such
as Florida’s hurricane prone Atlantic coast or the Mid-West’s “Tornado Alley”
the risk of unexpected property damage is always there and the mortgage
industry has relied on required insurance to mitigate its risks.  But for a variety of reasons, costs, a lack
of understanding of the risks, or the absence of a requirement to insure
against most specific risks (floods being the exception), many homeowners don’t
maintain adequate coverage, especially for less common or widely known
risks.  Disasters like Hurricane Sandy have
highlighted this but until recently very little could be done to quantify differences
in the risk of a natural disaster from one property to the next.

Dobbyn says it is now possible however
to pinpoint these risks at the individual property level, thus helping to protect
the homeowner and reduce or prevent losses by the mortgage lender.  While she is clearly promoting a new CoreLogic
service with her article, the concept and the technology behind it are
interesting enough to overlook the salesmanship.  

She says that recent advances in
spatial and natural hazard sciences make it possible for example to measure wildfire
risk based on the topography and type of ground cover around a home or to
predict the likelihood of a property flooding during a hurricane based on the
severity of the storm.  From this science
her company has developed a property-specific natural Hazard Risk Score (HRS)
that reflects the overall risk of any one disaster or a weighted score for
several natural hazards occurring at the same location. 

From this what she calls more accurate
prediction of the possibility a mortgage will default based on standard
measures of mortgage default risk (e.g., creditworthiness, ability to pay, loan
terms and down payment) CoreLogic has estimated a default model that adds in
the risk of natural hazards.  The company
used a random sample of more than 3 million first-lien loans that were active
at some point between January 1995 and March 2014, including prime, subprime
and government loans and were able to measure the reduction and the increase in
the average probability of default for markets with a natural hazard risks less
than and greater than the national average hazard risk. 

 

 

It found that seven of the riskiest
ten markets are in Florida
with its multiple hazards including wildfires, storm
surges, flooding and even sinkholes. The safest markets are in a variety of
locations, but non-coastal New York State had three of the five safest.  The typical increase or decrease to account
for natural hazard risk is about 2 to 3 percent, which Dobbyn says is “certainly
not inconsequential when one considers that mortgage default rates, recent
history excepted, are very low to begin with.”

As long as Americans continue to
grow in numbers and continue to like living along the coasts the housing stock
will be increasingly susceptible to natural disasters and now CoreLogic
maintains that mortgage risk can be assessed by a property’s specific location
and its propensity for natural disasters.  

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