New study uncovers big banks' alarming practices that could be harmful to homeowners: 'It's quite concerning'

Big banks are issuing fewer mortgages in wildfire-prone areas in California, which could make it harder for prospective buyers to afford homes.

What's happening?

As The Washington Post reported, the shifting climate is contributing to larger and more frequent fires in the Golden State, prompting traditional lenders to hesitate in approving home loans, and some are pulling out of the market altogether. However, online or "fintech" lenders have moved in to fill the void, offering more attractive loan terms to borrowers in areas with high fire hazard severity. 

While online lending platforms give homebuyers more options, experts worry that the trend could be disastrous if too many residents default on their loans after a fire or other natural disaster.

Tyler Haupert, an assistant professor of urban studies at NYU Shanghai, told the Post that the practice "could cause losses for Fannie Mae and Freddie Mac, the government-sponsored mortgage giants whose debts are guaranteed by taxpayers."

Meanwhile, if home insurance is more expensive and harder to obtain, it could discourage homeownership in high-risk areas. 

Parinitha Sastry, an assistant professor of finance at Columbia Business School, said that big banks are increasingly incorporating insurance into their climate risk management strategies.

"But if you look at the actual trends on the ground with insurance markets, it's quite concerning."

Why is the insurance crisis in California concerning?

As the warming planet contributes to more extreme weather events in vulnerable places, such as California, big banks are becoming more cautious about extending home loans to borrowers, as the risk of defaults increases substantially.

Across the globe, major disasters such as floods, hurricanes, and fires have caused significant damage to properties, making it more expensive to repair them and causing insurance companies to raise premiums. 

In places like California, where properties and insurance rates are already expensive, the shifting climate is making homeownership unaffordable for many. Those who can afford it may have to settle for costly insurance policies, or last resort options such as the California FAIR Plan, which is less expensive but only covers the basics. 

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Online lenders are another option, but Haupert said that "he fears these companies' willingness to lend in areas with high wildfire risk could have far-reaching effects on the housing market."

While government-backed mortgage giants have plenty of resources at their disposal to weather climate shocks, the system is under increasing strain on multiple fronts. As insurers exit markets that they've deemed too risky to continue operating in, or increase rates to offset losses, homebuyers are more likely to default on home loans, according to a study by S&P Global. 

What's being done to help the market?

California lawmakers are employing catastrophe models that can gauge wildfire risks and estimate costs of potential disasters, which could make it easier for insurers to manage risks. The state has also implemented measures designed to protect homeowners in wildfire-prone areas by requiring insurance providers to write a certain percentage of policies in these areas. 

Some city councils have also proposed fire prevention regulations — such as requiring homeowners to clear debris near their properties and create firebreaks — that could keep homes from burning down in wildfires. This can lead to lower premiums and more affordable insurance. 

If you live in a high-risk area, it's a good idea to keep tabs on the specific climate issues that may impact your city or town. By staying one step ahead, you can make smart choices to mitigate potential hazards and keep you and your property safe.

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