The Mortgage Implications Of Wildfires

When people think of wildfire risk, they probably think of heavily wooded forests and the second homes located within these scenic, remote areas. But a new report from CoreLogic indicates that more than 1.2 million residential properties across 13 states in the western U.S. are currently at high or very high risk for wildfire damage. Those properties have a total value estimated at more than $189 billion.

Among the urban areas the report analyzed, Los Angeles had the most single-family residences exposed to wildfire risk, with more than 60,000 properties in the high or very high risk categories.
‘It's a misconception that a home has to be surrounded by forest to be at risk of a wildfire,’ says Dr. Thomas Jeffery, senior hazard scientist for Irvine, Calif.-based CoreLogic. ‘We saw that with the Waldo Canyon fire.’

In that 2012 fire near Colorado Springs, Colo., wind blew burning embers into a cul-de-sac, burning homes outside the forest.

CoreLogic assigned a numeric risk score to each property, ranging from 1 to 100. According to the report, more than 1.5 million homes are assigned the highest Wildfire Risk Score (from 81 to 100). The report breaks down the residential property risk into four geographic levels – regional, state, metro and ZIP code, which CoreLogic said should help the insurance industry, financial services companies, homeowners and others better understand wildfire risk in the U.S.
‘Obviously, most of our business has been done with the insurance industry,’ Jeffery says. ‘I think the mortgage industry has a parallel interest.’

One area of interest relates to foreclosed homes. If a borrower is no longer making mortgage payments, that means the insurance premiums normally included, and escrowed, in those payments are not being paid. So, the lender has to take on those payments and then decide what to do after the fire.

The lender has other post-fire challenges, such as what happens to the overall housing stock of an area. David Battany, chief of product strategy with Moorpark, Calif.-based lender and servicer PennyMac, says the value of a home after a wildfire can increase or decrease, depending on several factors. If the scenario is half the houses have not been rebuilt, supply and demand could make the new, rebuilt homes more valuable. Another plus, he says, is the new homes might be built with higher-quality, more fire-resistant materials.

One negative, Battany says, is if the fire is especially hot and lasts for days or weeks and the land is damaged, too. The landscape itself might be less attractive for years, and potential borrowers might hesitate to buy or build a home in the charred area.
‘That is a unique risk,’ says Battany, who is also a member of the board of directors for the California Mortgage Bankers Association. ‘It's not a risk in an urban area.’

In cases of wildfires, servicers could – but are not required to – offer borrowers forbearance. In August, Fannie Mae released Servicing Guide Announcement SVC-2013-16, ‘Updates to Assistance in Disasters.’ The updated forbearance requirements are for servicers of mortgage loans secured by properties affected by a disaster.

If the servicer achieves Quality Right Party Contact (QRPC) with the borrower within 90 days after the disaster and the borrower was current or less than 90 days delinquent on the loan before the disaster, the servicer may offer up to 12 months forbearance. If the borrower was more than 90 days delinquent, the servicer may offer up to six months forbearance. If there was no QRPC, the servicer may offer up to three months forbearance for current and delinquent borrowers. The updated guide also has requirements for how the servicer should release insurance claim settlements.

In its report, CoreLogic noted that Texas, California and Colorado have the largest number of properties categorized as very high risk, with a combined property value exceeding $34.5 billion.

The report also highlighted the importance of factoring wildland urban interface (WUI) into wildfire risk analysis. WUI is the area where urban development and wildland intersect. The report noted that from 1990 to 2008, nearly 17 million new homes were built in the U.S., of which 10 million were located in WUI. That means more homes in other areas will likely be at risk as more people build homes and more lenders offer mortgages in these areas.

Nora Caley is a Denver-based freelance writer.


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