Houstonians in the flood stricken areas are focused on surviving and looking for a place to stay, not finding a way to pay their monthly bills or mortgage payments on homes that may be destroyed.
That is why Fannie Mae, Freddie Mac and the Federal Housing Administration, which back the vast majority of mortgages today, have already announced that they will offer forbearance for at least 90 days to borrowers in the Houston area and could, in some cases, extend that up to a year.
That means borrowers would not have to make their monthly payments, and no penalty fees would be charged. Interest, however, would still accrue; the offer is a band-aid, not a cure.
It is difficult to know what exactly Houston homeowners will find once the floodwaters recedeâ€”whether their homes can be dried out, cleaned up and made habitable quickly, or whether some will be total losses. Given the record rainfall, there will likely be many of the latter.
The unprecedented nature of a natural disaster like Harvey makes both comparisons and predictions difficult but not impossible. Hurricane Katrina, with its own intense flooding, is possibly the best comparison for those looking to gauge what will happen with homes and mortgages.
In the Houston area and outlying areas hit by Hurricane Harvey, there are more than twice as many mortgage properties with nearly four times the unpaid principal balance as there were in the Louisiana and Mississippi counties hit by Hurricane Katrina in 2005. If the impact on homes is similar, more than 75,000 Houston borrowers could become unable to make a mortgage payment within the next two months and 45,000 could become seriously delinquent on their loans in the next four months, according to Black Knight Financial Services.
Whether or not people can or choose to keep paying their home loans will depend entirely on their insurance.
“It all comes down to your policy. FEMA has caps and limits and Houston is not in a traditional flood plain,” said Ben Graboske, senior vice president of data and analytics at Black Knight Financial. “It will come down to whatever individual premium and policy coverage included. That could be about 25 percent of what a house replacement cost is.”
Borrowers in Houston currently have more equity in their homes than did Katrina homeowners because Mississippi and Louisiana used more low-down-payment mortgages back in 2005. Today’s mortgage market is far more strict, post-financial crisis, and borrowers generally have more skin in the game. In 2005, about 20 percent of borrowers in Katrina-stricken areas had less than 10 percent equity in their homes. In Houston today, that percentage is barely 4 percent, which should give them more incentive to stay, but not necessarily.
“I don’t think anyone anticipated an event like this. If people didn’t have full coverage then that factor could overcome that strong equity position of the Houston population,” Graboske added.
The simple fact is that no one can predict what borrowers will do until the damage is assessed and categorized. Was it a flood, a natural disaster, or an act of God? All these insurance terms translate into money. If water came in through the foundation the home is covered differently than if wind blew out a window and water came in that way.
“This is an unprecedented crisis in the region as it relates to housing. We are not even at the point where we can evaluate the total costs, walkaways, insurance coverage, homes uninsured, jobs lost, not being able to make your mortgage paymentsâ€¦” said Dave Stevens, CEO of the Mortgage Bankers Association.
The MBA is already in war-room mode, putting out fact sheets for borrowers, sending loan data to the Trump administration and launching a Harvey web page, but it is impossible to know how much money homeowners will get to repair or rebuild, which will inevitably determine whether they stay or walk away. It is also impossible to determine how mortgage servicers will pay investors, where that liquidity will come from if borrowers stop paying.
“The answer is just not there. The providers of mortgage credit today haven’t established the answer to that particular question,” said Stevens. “You want to encourage people to stay in their homes. You don’t want to have people collect the insurance and then walk away. The determination of how to respond has not been established yet. If borrowers do walk away, are you going to enforce or write off?”
Getting answers to those questions will be a very long process. The Department of Housing and Urban Development has announced recovery loan options as well as possible funding through the Community Development Block Grant program, but that goes to states and municipalities, not directly to homeowners. Even that money will take months, if not years, to get, as it all comes through the Congressional appropriations process.
“Politics gets involved. Where these disasters strike often determines when government gets around to it,” said Brian Sullivan, an HUD spokesman. “There is a lot of work we have to do before the money goes out our door.”
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