Mortgage Access Threatened by Insurance Crisis, Fed Chair Warns
The escalating insurance industry crisis poses a significant threat to mortgage availability in certain regions of the country in the coming decades, according to Federal Reserve Chairman Jerome Powell.
"If you fast-forward 10 or 15 years, there are going to be regions of the country where you can't get a mortgage," Powell said during his semiannual testimony before Congress.
Insurers have been withdrawing from coastal and fire-prone areas due to escalating risks stemming from climate change, resulting in substantial financial losses. State Farm, for example, canceled thousands of policies in Los Angeles' Pacific Palisades neighborhood before catastrophic wildfires devastated the area.
As a result, prospective homeowners are increasingly turning to state-designed insurers of last resort, which offer less comprehensive coverage and higher premiums than conventional insurers. Banks and insurance companies will cease lending and providing coverage when confronted with mounting evidence of disasters, Powell stated.
While interest rate normalization may alleviate some affordability concerns in the long term, Powell emphasized that supply constraints remain a major obstacle, an issue outside the Federal Reserve's jurisdiction. Despite potential rate reductions, Powell noted that the impact on housing inflation is uncertain, as increased demand could offset the benefits.
Powell acknowledged the government backing of Fannie Mae and Freddie Mac's impact on lowering mortgage rates. However, he stressed that the decision regarding their future rests with Congress, adding that "putting housing finance back in the private sector has some appeal over the longer run."