Mortgage holders are almost twice as likely to default when a natural disaster occurs in their area, according to a report from CoreLogic.
The firm's August MarketPulse report finds that borrowers in high-risk areas for natural disasters are nearly twice as likely to miss a payment compared to borrowers in low-risk areas follwing an event. Miami has the greatest exposure to mortgage default risk due to natural hazards.
In the report, CoreLogic officials assert that in the past, there really has been no way to systematically measure risk from natural disasters to lenders and investors. However, the firm has developed a natural hazard risk score tool that measures general risk by geographic region.
By combining the data from the natural hazard risk tool with its extensive data on default rates, CoreLogic was able to establish a relationship between natural disasters and default. Interestingly, but perhaps not surprisingly, it found that borrowers with high loan-to-value (LTV) ratios, in other words, those with less equity in their homes, were almost twice as likely to default when a natural disaster strikes. In addition, borrowers who are deemed high risk are also more likely to default after a natural disaster strikes their property.
‘Through the recent crisis in the housing and mortgage finance markets, the industry has learned a lot about how to better manage and predict risk,’ CoreLogic says in the report. ‘The cost of not doing so is far too high.’
‘One risk that we have historically presumed is covered by requiring insurance is the risk of mortgage default due to natural disasters,’ it continues. ‘Our research demonstrates that borrowers, after controlling for their propensity to default based on traditional mortgage credit characteristics, default at a higher rate the higher the propensity of natural disaster is at the property level. This may be because they are either under- or un-insured against the natural hazards to which the property is exposed.’
The firm points out that the job of predicting risk from natural disasters is continuous.
‘Natural hazard risk is another new frontier of risk management,’ CoreLogic says in its report.
In June, CoreLogic reported that it was partnering with Weather Services International (WSI) to track the risk of weather-related events to residential and commercial properties across the U.S., starting with the number of cloud-to-ground lightning strikes.
By integrating WSI hazard data with its RiskMeter Online platform, CoreLogic will be able to ‘provide insurers and other decision-makers access to a new level of understanding in property-level natural hazard risk analysis,’ says Dr. Howard Botts, vice president of database development for CoreLogic Spatial Solutions.
In addition, the August MarketPulse report, which analyzes refinance activity in the U.S. housing market, forecasts that roughly 70% of the expected dollar volume of refinance originations for 2013 has already occurred – due to rising rates as well as rising home prices.
‘It is clear that the recent rate increases are already having an impact on the refinance market,’ the report states, adding that the July 26 Mortgage Bankers Association Weekly Applications Survey showed a decrease in refinance applications of 12% from the prior month and 59% from the prior year. ‘Housing market forecasters are expecting that the recent rate rise will reduce refinance origination volume for the second half of 2013.’
The report forecasts that originations for 2013 will range from $1 trillion to $1.1 trillion, with $700 billion to $800 billion already completed through the first half.
To download a copy of the report, click here.