Ted Tozer explains the climate threat to lenders, servicers

Ted Tozer: climate change will drive g-fees, repurchases up

April 23, 2024 4:00 AM

Ted Tozer is warning lenders and servicers to pay heed to the effects of climate change, which could devalue servicing and prompt repurchases.

The former Ginnie Mae leader and housing strategist, outspoken on mortgage issues since he left his post in 2017, voiced many concerns about the threats that warming temperatures and more severe weather pose to lenders, servicers, property insurers and borrowers at the Americatalyst conference in Washington, D.C. last week.

Tozer, in an interview with National Mortgage News, defined the climate challenge for mortgage firms, which includes more guarantee fees, repurchases and devalued servicing. While acknowledging the term "climate change" is a sensitive topic among some, Tozer emphasized the industry should not focus on the causes of worsening weather but rather the impacts that changes like rising waters could have on America's housing finance system.

Editor's note: This interview has been edited for length and clarity. Reporter questions are in bold and Mr. Tozer's responses are below each in body text font.

What are some of the ways climate change is impacting the housing market?

The most obvious thing happening right now is the incredible increases in homeowner's insurance. That's happening from the severity of incidents that are occurring.

Then you also get into this concept: Look at Lake Mead near Las Vegas. Look at the Colorado River, it's drying up. You've got places like Phoenix that lie off that river. If all of a sudden residents can't get any water, if all of a sudden peoples' water bills go through the roof, that would impact home prices.

What happens if all of a sudden places like New York City, or Baltimore, or Boston now have X amount of water constantly standing? What does that do to devalue the properties in those major cities? Home prices I assume are going to fall because people just aren't going to live in those areas.

Why should mortgage companies care about climate risk?

It's going to affect servicing. What does a customer service representative say when a borrower calls and says, "I can't find homeowners insurance at any price," when their mortgage requires it?

What do you do in a situation where a consumer, trying to save money because their insurance is going up so much, acquires the minimum of coverage to satisfy their mortgage? In a loss, people can lose everything.

I can see lawsuits coming against servicers [from borrowers claiming], "Why didn't you tell me that this minimum insurance was only to cover you as far as your losses?" I think it's going to be a servicing issue more so than an origination issue.

There could also be a situation too, if we go back to the housing crisis of 2008, where Fannie Mae and Freddie Mac, when homes depreciated, started putting loans back to lenders. Again we can start having major repurchase demands because Fannie and Freddie are looking at files and saying "You never should have approved this loan." Then the borrower is underwater because the home's lost its value.

A Canadian lender earlier this year stopped originating mortgages in high-risk flood zones in Quebec. Do you think a U.S.-based mortgage lender could undertake a similar move?

I think it's going to be backdoored in the form of servicing. Because when a borrower's house is damaged in a storm, even if they have homeowners insurance, the servicer usually takes the insurance proceeds and puts it into an escrow account. As repair work is completed, the servicer will release the money to the contractor just to make sure that the money goes back to their collateral.

So that means the actual cost of servicing could be higher. I can see servicing values starting to deteriorate in areas and that could produce a higher cost of servicing. In a roundabout way, maybe it doesn't stop lending in Florida and other areas, but all of a sudden your rates are higher. You may have to pay a higher interest rate in Florida than you do, say in Michigan.

What are you hearing from mortgage professionals?

I've heard numerous people talking about, for example, if they buy a service package, should they be somehow discounting the value of servicing in certain high-risk areas? I think those discussions are going on as far as determining the value of a loan in certain areas and how they should price it accordingly.

How do you see home insurers reacting to these climate risks in the next few years?

There's two different camps involved. One is saying that insurance companies are gonna pull out of areas because they just can't charge for the risk involved, because they can't quantify it. There's the other camp that says [insurers] are getting out because of the political pressure on [state] insurance commissioners, they're not allowing the insurance companies to charge for the risk. So there's shortages being created through politics, more so than insurance companies that want [or don't want] to issue policies.

No insurance company on its own can hold the homeowner risk now because it's so dramatic. That got laid off to reinsurers. So the question is, is the reinsurance market strong enough and deep enough to absorb these risks? Can the insurance companies pass along these reinsurance costs to the consumer? But no matter how you slice it, things are going up.

Do you think the private sector – lenders, servicers and technology providers – need to take more action to assess and take these risks seriously?

Lenders need to take this more seriously. I think sophisticated servicers understand this risk. I think some of the others that may not be quite as sophisticated putting it off thinking okay, Fannie and Freddie are going to take all the risk in the form of credit losses that occur, and we as servicers will be somewhat insulated.

Servicers have a vested interest to find out how to deal with this new normal, and not, "I'm just the guy who does what Fannie and Freddie tell me to do as far as handling losses and foreclosures." If you're doing Fannie and Freddie's instructions, you may still have expenses because of payroll and other costs for your staff to live up to what Fannie or Freddie are going to ask you to do when they start modifying their servicing contracts to reflect their attempts to mitigate their losses.

Are there any easy steps that lenders and or servicers can take tomorrow to address climate risks?

It's really, really, really hard. At this point we're trying to educate the consumer on the concept of their homeowners insurance getting more expensive, to the point where when they're approved for a new loan, that people should have extra income for a cushion as costs go up.

Also educating the consumer on replacement costs, to make sure they know that if they're going to go with a cheaper policy, that they're putting more risk in their home equity. I can see the insurance companies coming out with cheaper policies with no temporary housing. I'm fearful that consumers might take that and not realize that they're giving up a substantial benefit.

Can the industry address climate risks itself, or does the government have to step in via funding or regulation?

I can see Fannie and Freddie and Ginnie Mae start making [mortgage companies] analyze their portfolio for more risk and possibly hold more capital against those risks, to make sure they're gonna be able to survive this process. I would think the [Federal Deposit Insurance Corp.] and the [Office of the Comptroller of the Currency] should be involved the same way, making sure the banks are looking at their climate risk or looking at their loan portfolio.

On the flip side, I could see the FHFA tell Fannie and Freddie to make sure they're holding enough capital so they can survive those losses. As these issues get forced, homeownership is going to get more expensive because Fannie Mae and Freddie Mac may have to raise guarantee fees in turn.

Because of all that, I'm guessing some lending standards are going to tighten up to make sure borrowers can take on higher homeowner insurance costs and so forth.