Rising Insurance Crisis Threatens Mortgage Availability in Climate-Prone Regions
Federal Reserve Chairman Jerome Powell has raised concerns that the escalating insurance industry crisis could significantly impact mortgage accessibility in certain parts of the United States in the coming decades.
"Regions of the country may become virtually uninsurable within the next 10 to 15 years," Powell stated during his semiannual testimony to Congress. He highlighted the withdrawal of banks and insurance companies from high-risk coastal and fire-prone areas due to escalating natural disaster losses.
Insurers have been cancelling policies across the country as climate change intensifies extreme weather events. The resulting multibillion-dollar losses have led to cancellations of policies in areas like Los Angeles's Pacific Palisades, which later experienced devastating wildfires.
With mortgage lenders often requiring homeowners insurance, potential buyers are resorting to state-backed insurers of last resort. However, these policies typically come with higher premiums and reduced coverage compared to traditional options.
In response to concerns from Minnesota Sen. Tina Smith, Powell emphasized that banks and insurers are facing serious dilemmas in providing loans and coverage in areas with evident disaster risks.
During his testimony, Powell addressed the issue of high housing costs, acknowledging the Fed's limited role in addressing affordability concerns. "Interest rate normalization may ease the burden for buyers in the future, but addressing supply shortages remains beyond our purview," he stated.
Despite potential interest rate reductions, Powell expressed uncertainty about their impact on housing inflation, as increased demand could counteract any price decreases. "Lower rates could stimulate both buying and selling, potentially offsetting any downward pressure on housing inflation," he explained.
Powell also discussed Fannie Mae and Freddie Mac, noting that government backing has contributed to lower mortgage rates. He emphasized that congressional action is necessary to determine their future and suggested that "returning housing finance to the private sector may have long-term benefits."