Flood risk worries amplified by repeated government shutdown threats

Industry groups urged Congress to once again avoid a spending bill deadlock ahead of an upcoming vote on the issue, citing concerns about flood risks and operational impairments.

(Update: The House passed a stopgap bill to avert a government shutdown the evening of Nov.14. A new deadline for government funding of military construction, veterans' affairs, transportation, housing and the Energy Department was set for Jan.19, 2024 by newly elected House Speaker Mike Johnson, R-La. The Senate subsequently approved the measure.)

Eleven organizations, including the Community Home Lenders of America and the Mortgage Bankers Association, warned that 20,000 areas across the country could be jeopardized by a lack of flood coverage. The National Association of Realtors estimated that the absence of federal insurance for the risk, as part of a budget impasse, could disrupt 1,300 property sales.

"Averting a shutdown will prevent these disruptions to the real estate, home building, and mortgage lending sectors, which make up over 20% of the U.S. economy," said the coalition, which included the Housing Policy Council, Leading Builders of America, Manufactured Housing Institute, National Apartment Association, National Association of Home Builders, National Housing Conference, National Multifamily Housing Council and U.S. Mortgage Insurers.

If federal flood insurance became unavailable due to a shutdown, some coverage could be obtained in the growing private market, but more than two-thirds of those needing it could have trouble with access.

Even without a government shutdown — which could also interrupt housing programs and underwriting verifications, and raise rates — new studies suggest the flood risk, in line with associated coverage, is growing increasingly expensive. 

The expected annual damage that flood risk poses to federally backed mortgages, based on experience dating back to 2020, is $9.4 billion, according to a Congressional Budget Office study released Monday. 

By 2050, the estimated EAD in 2020 dollars could be anywhere from $10.2 billion to $16.1 billion, based on the range of lower-than-anticipated and upper-end projections for disaster risk.

While the National Flood Insurance Program addresses some of that risk, 40 to 50% of it lies outside areas on federal maps that designate it for coverage, the CBO found. Those maps can be inaccurate reflections of risk due to departures from historical experience and update lags.

Flood risk is a concern to all types and sizes of mortgage businesses to some degree, with property damage from it hurting the value of servicers' collateral and loan performance. Access to coverage is a potential impediment to new originations.

With nonbanks and chartered mortgage subsidiaries of depositories still generating losses, according to the latest quarterly data released from the MBA, neither side of the business can afford any setbacks. Rates have remained elevated, meaning most of their profits have come from servicing.

A whipsaw change in rates as would be likely in a government shutdown is unlikely to benefit either servicing or origination as volatile swings can lead to costly operational and valuation adjustments.

Rate-indicative bond yields were lower at deadline Tuesday due to a lower-than-anticipated inflation reading but if there's a government shutdown on Friday, when stopgap funding is set to run out, they'll likely soar.

A shutdown "could push rates higher, because the greater the risk, the greater the rate," Melissa Cohn, regional vice president, William Raveis Mortgage, said in an email comment Tuesday morning.