HOUSING CRISIS: California Could Face Mortgage Default Tsunami

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At CNN Yuliya Panfil and Dona Stewart describe a mortgage crisis that could soon hit California’s middle-class homeowners, and they make a long case that the fault lies with climate change and greedy insurance companies who want to actually get paid for providing a service. But as Your Survival Guy explained recently, California’s laws are really at fault, driving insurance companies into unprofitability and a predictable exit from the state. Panfil and Stewart write:

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Last month, insurance giant State Farm (California’s largest insurer) announced it would not issue any new homeowner policies in that state, citing rapidly growing wildfire risk. Days later, another major insurer, Allstate, publicly noted that it had also stopped providing California homeowner policies last year due to wildfire risks, high home repair costs and reinsurance premiums. Together with American International Group’s (AIG) decision last year to stop renewing some policies, these moves drastically reduce the availability of property insurance across a state in which more than 2 million of the state’s 14.6 million owner-occupied homes are at high to extreme risk for wildfires.

As climate-driven disasters grow in frequency, severity and cost — according to the National Oceanic and Atmospheric Administration (NOAA), there were 18 separate billion-dollar weather events nationwide last year, costing $165.1 billion — insurers and reinsurers (the companies that provide financial protection to insurers) are moving to mitigate their riskexposure. Some, like State Farm, are deciding to pull policies altogether. In Florida, 10 insurance companies have stopped providing homeowner coverage in the last three years as a result of losses to hurricanes and high levels of insurance fraud and litigation.

Other insurers are setting payout limits or rapidly raising rates for homeowners. Louisiana’s public insurer, Citizens, increased annual premiums to an average of $4,700 last year. These rates exclude flood insurance, which must be purchased separately through the National Flood Insurance Program.

While these decisions make some financial sense, they also threaten the housing security of millions of low- and middle-income homeowners living in climate-vulnerable areas. And while the insurer exodus and severe rate hikes are currently occurring in just a few states, it is likely to spread in the coming years as millions more Americans across the country are impacted by increasingly frequent and severe wildfires, storms and floods, according to New America. Such weather and climate disasters have increased five-fold since the 1970s.

When major insurers flee, they create insurance deserts, characterized by a dearth of providers and extremely costly premiums from the few insurers that stick around. Since most mortgage lenders require borrowers to carry property insurance, losing insurance coverage could cause current homeowners to default on their mortgages. Not being able to afford home insurance could similarly preclude prospective homeowners from obtaining a mortgage loan.

Action Line: Insurers didn’t just wake up one day and figure out that California was expensive. Policies at both the state and federal levels have forced insurers to rethink California. No insurance company wants to leave the country’s largest state by both population and GDP. Neither do the thousands and thousands of people leaving California for a better America. It’s the policies enacted by California’s radical governors like Jerry Brown and Gavin Newsom that are pushing the state’s businesses over the edge. When you’re ready to look for a better America, start your search with my Super States. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.