Harvey-Stricken Houston Homeowners Could Default on Their Mortgages
Many Houston, Texas homeowners have been forced to leave their homes that were destroyed by Hurricane Harvey and the resultant flooding. Finding a place to live is their biggest worry now, so covering their monthly mortgage payments may no longer be on their agenda. Affected homeowners do not know if they will ever see their houses again.
Foreseeing the likelihood of mortgage defaults, government agencies Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) are already preparing for the worst.
The agencies have announced that they will be offering forbearance to the flood-stricken homeowners for 90 days, which may be extended to a year. However, for homeowners whose houses are completely destroyed, the forbearance incentive may not be attractive at all.
The Houston area has more than twice as many mortgage properties as did Louisiana and Mississippi when they got hit by Hurricane Katrina in 2005. Further, the outstanding principal balances on the Harvey-stricken properties are nearly four times that of the Katrina-hit properties in 2005.
Nonetheless, mortgage borrowers in Houston today have higher stakes in the game than Louisiana and Mississippi homeowners did during the housing bubble era when Katrina hit. Only four percent of Houston homeowners have put down less than 10% of equity for their mortgages.
Since Houston homeowners have put up more equity in their houses than did Katrina-stricken homeowners, there’s a chance that they won’t be willing to let go of their houses so easily. Yet, the final number of defaults will ultimately depend upon the individual homeowners’ insurance coverage, and that factor does not add much optimism to the story.
The National Flood Insurance Program (NFIP), which falls under the Federal Emergency Management Agency (FEMA), is already running out of money. In fact, the program is expiring next month and is already roughly $25.0 billion in debt before Harvey affectees make any claims.
Even if the program is extended, its insurance coverage is limited and could only cover a fourth of an average homeowner’s house replacement costs. It’s likely that many Houston homeowners won’t have a choice but to default on their loans if they don’t have enough money to pay for the reclamation or restoration of their houses.
“Harvey hits mortgages as flood-stricken homeowners are unlikely to pay,” CNBC, August 30, 2017.