Although Hurricane Helene and Hurricane Milton have now passed, the social, environmental, demographic, and economic damages are still being tallied, including those for lenders and servicers. In fact, as I finish this article in mid-November, there is yet another hurricane brewing in the Gulf of Mexico, with its sights set on Florida. So, it seems like more hurricanes, and bigger impacts are being felt. The most acute economic impacts will likely be felt in the near term, as the repercussions of the storms weigh heavily on the areas most affected. Over the longer run, rebuilding efforts and an influx of government aid should help bring about a recovery. That said, the hurricanes hit wide swaths of the region not accustomed to dealing with storms of such magnitude. The substantial public assistance already announced is an encouraging sign that the restoration process has already begun, however the potential out-migration of residents, businesses, and investment capital casts a high degree of uncertainty on the timetable for recovery. And then there is the impact on long-term affordability for homeowners, which I will discuss in more detail.
Hurricane Helene hit Florida on September 26 as a Category 4 hurricane. The 400-mile-wide storm traveled at 30 mph with sustained winds reaching 140 mph and created a storm surge of 15 feet. The storm system had formed just two days prior in the Caribbean, giving residents little notice. But that wasn’t the worst of it as Helene traveled 500 miles up through Georgia, the Carolinas, and Tennessee bringing heavy rain and flooding. Two weeks later, Hurricane Milton hit, battering the Gulf Coast as a Category 3 hurricane and producing more than 100 tornado warnings in a single day! Hurricane Helene’s most devastating effects were felt in western North Carolina and eastern Tennessee, areas unprepared for the historic combination of heavy rain, flooding, and mudslides.
CoreLogic estimates that Hurricane Helene likely resulted in between $30.5 billion and $47.5 billion in losses from property damage and business interruption. Hurricane Milton’s total wind and flood loss could amount to between $21 billion and $34 billion across Central Florida. Hundreds perished. The funding of loans shut down, of course. And the companies that own the servicing rights in those areas have only just begun to feel the financial consequences. But the Asheville, North Carolina and Tampa and Sarasota, Florida metro areas and their surrounding counties are on strong economic footing. Unemployment rates in Asheville, Tampa, and Sarasota are near historic lows.
Lenders ask, “Where do these areas go from here?” Wells Fargo notes that, “The economic costs of natural disasters depend on a great many of factors such as population and infrastructure density, insurance coverage, size of government aid and the severity and type of natural disaster. Simply put, quantifying economic impacts is challenging because no two natural disasters nor the regions they affect are the same.”
The world has seen an increase in disasters and catastrophes, so research and data has also increased. Natural disasters destroy property, infrastructure, and wealth, but usually only derail economic activity temporarily. Local economies tend to move forward relatively quickly, and with them, lending. But housing stock is negatively impacted as residences are either destroyed entirely or take months to repair. Residents must find places to live, putting a strain on the overall residential situation. This is where the human side of lending is so important. Originators must be able to connect emotionally with borrowers as they process the loss of a home in the midst of searching for a new one.
Much of an area’s ability to bounce back depends on the infrastructure before the disaster hit, as well as the quality of housing stock. Do most residences carry flood, earthquake, or fire insurance? 2005’s Hurricane Katrina destroyed an estimated 300,000 residential properties, many of which were not rebuilt.
The federal government steps in, and agencies, with familiar names to anyone in residential lending, assist in recovery efforts. The Small Business Administration, Department of Housing and Urban Development (HUD), and Department of Agriculture deploy personnel and provide some level of financial assistance to households and businesses. The Federal Emergency Management Agency (FEMA) is usually the largest contributor in the wake of natural disaster through its Disaster Relief Fund (DRF) funded by Congress. Federal funds to support the recovery efforts are not a cure-all, but they will help economic recovery begin.
On a smaller scale, lenders and servicers, especially loan officers, can help answer questions from clients. This can help solidify the customer facing impact of an originator, often invaluable after a disaster. In a recent CX Tip, STRATMOR Customer Experience Director Mike Seminari talked about the importance of emotional check-ins with clients. “Empathy is powerful because it rarely happens outside of familial relationships and friendships. When you authentically care about someone, they can feel it. It creates reciprocal care and loyalty.”
As residents of any disaster replace damaged vehicles and rebuild impaired properties, many of these economic measures bounce back quickly. But the compounding effects of natural disasters do appear to be building, whether they be forest fires in the West or hurricanes in the South. Insurance premiums have risen sharply throughout the United States in recent years, in part reflecting the frequency of events and the high cost of rebuilding.
High insurance costs have already impacted the affordability of owning a home, not only in disaster prone areas but also areas where “nothing happens.” Regions with high poverty rates and lower insurance coverage struggle to absorb economic shocks. Residents being displaced impact the housing inventory, and there could also be an out-migration of higher-income residents who are able to relocate. Population outflows could spark a decline in home values, decrease household wealth and lead to an increase in poverty rates, impacting lenders and servicers.
One of the major areas hit is Florida, whose coastal real estate market has always been driven by second-home buyers and retirees. The Florida economy is popular with retirees because housing expenses are mostly fixed because of the state’s heavy reliance on Homestead (owner-occupied) rules that cap the amount of increases in Real Estate taxes – meaning that you can be assured your taxes don’t go up very much even if Real Estate value sky rockets. And historically, insurance costs in Florida were always high, but did not go up that much until recently. Insurers are pulling out, and residents are reporting increases of two to three times over a few years period. So suddenly that fixed income which easily supported the ‘fixed’ payment is looking pretty tough to handle increases in insurance alone that can exceed $1,000 per month. So even if your house is not impacted by damage, the insurance company is going to try and make you pay more for the risk that it could in the future. In fact, I talked to a STRATMOR advisor (and Florida resident) about the risk of higher insurance costs, and his immediate response was his personal story of his premium tripling in the last three years. He then commented that his way of tackling this high premium is likely to pay off his mortgage and crop his hurricane insurance which is hardly what a mortgage servicer wants to hear as the potential solution.
But most regional economies do eventually recover from natural disasters, and if you’d like to dig into the details, the Federal Reserve of San Francisco has a worthwhile research piece suggesting that recoveries yield stronger economic growth over the long run as less-productive local assets are replaced by more-productive assets. Often there is a “build back better” effect where updated infrastructure and government aid ultimately leads to higher income and employment growth, something that can help lenders and servicers over time. This, combined with lenders who have “boots on the ground” to help those impacted, once again point to the value of the human originator.
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