During the last few years, we have had a number of disaster declarations across the country that involved significant loss of real property and property damage. From the recent floods in Texas, fires in California and hurricanes along the Eastern seaboard, no geographic area is excluded from weather extremes and their aftermaths. Some scientists indicate these disasters will continue to increase based on climate changes; whether you believe our climate is changing or not, the fact is many areas of the country are experiencing these catastrophic events in numbers as never seen previously.
In California during 2015 alone there were two major wild fires that were among the top 20 most devastating fires in the state’s history. They covered 146,935 acres and affected 2,876 structures. Most recently, there has been historic flooding in Texas that is affecting homes along the Brazos River. Records indicate that flooding of this magnitude has not occurred in more than 50 years. As a result of these disasters many people have suffered losses that they never thought would happen. Fires and flooding are only two natural disasters that can impact properties. Disasters such as flood, fire, earthquakes, tornados and windstorms affect thousands of people and properties every year. As noted, the number of and magnitude of these natural disasters is trending upward – which begs the question: are you and your borrower ready?
While many disasters are difficult to predict, mortgage lenders need to initially complete due diligence when lending in areas where the potential for disasters can occur and affect the risk on their property. If in a rural area, does the insurance cover the potential for a forest fire, or in areas where rivers exist, does the insurance provide coverage if flooding occurs? Does the property meet all building requirements for areas that flood or are subject to earthquakes? Again, based on potential disasters, does the insurance on the property provide coverage for the borrower which in turn mitigates any potential loss on the mortgaged property? Coverage can be confusing; for example, in the case of earthquake insurance, it will cover the damage from an earthquake but does not cover damage that results from a tsunami (which can follow an earthquake) that is covered under flood insurance.
There are three phases that the mortgage lender should seriously consider participating in when it comes to natural disasters: the preparation for a disaster, involvement when a disaster occurs and what is needed after a disaster has occurred.
Preparation with Education
Mortgage lenders should be supportive of their borrowers in areas that could be affected by natural disasters. Providing educational material is a simple way to assist. Lenders could initially consider including a mailer, helping borrowers recognize how to prepare for a disaster situation should one occur and suggestions on what to do to protect themselves and their property prior to a possible event. Websites such as https://www.ready.gov/natural-disasters can provide valuable information.
Preparation initially involves follow-up with borrowers to ensure the proper insurance is in place and current, based on the types of disasters in their specific area. As mentioned, there are government resources available that can help homeowners as well as insurance companies that have information that addresses some of the steps that could be taken. In areas where there is a potential for forest fires, one suggested step may be maintaining an area that is at least 30 feet around the home that is free of material, such as brush that will easily and quickly burn. If there is a potential flood area, homeowners should know the difference between a flood watch and a flood warning and take precautions with any items that could be moved by flood waters.
When Disaster Strikes
Even with the best preparation in place, when a disaster does occur, the damage may be greater than expected. According to Barbara Sullivan, the tax collector and treasurer of Calaveras County, California, who was discussing the devastation of the 2015 California Butte Fire “you can’t prepare for an event like this.” Even with disaster plans in place for the county, the magnitude of the event was far beyond anything anticipated. As an example, during the event, Sullivan said she visited the county animal shelter and simply because she had on her county badge, volunteers quickly looked to her for direction in the chaos. She gladly assisted, as many pets and livestock were displaced in the disaster. The county and its residents are still trying recover from the devastation.
Mortgage lenders should be prepared to assist their borrower with information when a disaster occurs, such as helping them with insurance filings, securing the property and mitigating any additional damage. There will be government agencies, such as the Red Cross, Office of Emergency Services and others that will provide assistance if displacement occurs as well. Lenders should also consider how they will reach a borrower in the case that he or she has to move from the property due to damage.
After the Disaster
Finally, after the disaster an assessment of the damages and needed repairs needs to be conducted ensuring that the borrower does not become a victim. There are people who prey on these types of situations, such as unethical construction companies that often provide repairs that are of poor quality or incomplete resulting in further degradation of the property. If a lender has a program in place to help borrowers in these types of situations such as payment deferrals, they should offer it until the borrower is back on his or her feet. Helping the borrower get in touch with the local government agency is important as they will have services available and can answer questions.
The effect on real property can be dramatic; values of these properties in areas hit by disasters can be greatly impacted. Lenders could help homeowners navigate the government agencies that manage property taxes to better understand the changes that have occurred that will alter tax valuation including a possible delay in payment or exemption in the actual taxes owed because of the disaster.
Property assessment and taxation changes vary by state, for example with California fires, the agencies follow a state law which is covered under reassessment for property damaged by natural disaster or calamity. The state allows the property owner to apply for a tax deferral based on the date of property damage and will prorate for the tax year in which the disaster occurred. Value reduction would occur after the fact in the form of a corrected bill. Texas, on the other hand, has a reassessment period that is based on the property status as of January 1 of that year, so any damages occurring after that period would not result in an immediate change for taxation. Properties in the area of these disasters will see some form of valuation decline going forward, all dependent on the direct effect of the disaster and whether or not they have corrected any property damage by the next assessment period.
Overall, lenders need to be proactive in their risk mitigation; the goal is to help the borrower stay in the property. They must be involved in the process of properly securing the property until any damage can be repaired. Keeping the property in a condition so it can be occupied is paramount.
Disaster mitigation, as it relates to securing properties, is a joint effort between lenders, borrowers and government agencies. The more involved a lender is in the process of preparation, the more valuation support they can lend. Having a recovery plan in place if a disaster does occur will help ensure that the borrower and lender will become whole again as quickly as possible.