As more parts of Florida experience chronic flooding, there has been heightened discussion about what happens when governments decide they cannot continue fighting encroaching seas with expensive infrastructure improvements in highly vulnerable areas.
“Managed retreat,” which should be more appropriately termed “cooperative relocation,” is a complex issue involving finance, public policy, psychology and engineering. Some ocean-threatened residents are faced with the stark reality that their property may become worthless and they might even have to abandon it.
Many stakeholders have vital interests, from national to local governments and Wall Street down to Main Street. Each will play a critical role in the approaching retreat process.
According to a November MarketWatch.com report, “$60 billion to $100 billion in new mortgages are issued for coastal homes each year.” The report states commercial banks, at the same time, are reducing their “climate-change exposure” by selling riskier mortgages to taxpayer-based entities such as Fannie Mae and Freddie Mac.
Whether you live in a threatened coastal zone or not, if taxpayer reliant mortgage interests are absorbing “disaster area mortgages,” your financial security is vested in a sea-rise lending strategy that supports not just local communities, but the national economy.
Business and political leaders must begin to prepare for the eventual retreat from some coastal communities. Homeowners and condominium and homeowner associations are now tasked with devising sea-level rise (SLR) strategies that includes plans for some people to move away.
CNBC.com reported last year that a “foreclosure crisis spurred by climate change is becoming a real threat to the mortgage industry as extreme storms and other natural disasters increasingly occur in places where borrowers might not have flood or fire insurance.” Citing a former executive at Freddie Mac, the post emphasizes that the mortgage industry is not prepared for rising seas.
So, what happens when a property owner realizes his or her biggest investment is turning into a diminished asset? How will those who owe mortgage payments, with limited incomes, deal with the complex options of SLR retreat?
Mortgage lenders have a key role in planning for altered coastlines. They need to be aware of SLR projections and recognize the limited resources of local governments. And they need to safeguard their investments.
Homeowners who have built equity need a responsible exit plan if staying on their properties becomes a public health risk. Mortgage lenders need to work with experts to devise a cooperative retreat solution that helps people move while protecting the lenders themselves.
When homeowners decide they must save for purchasing other properties, many will not be able to pay their monthly obligations. And, condominium and homeowner associations will find themselves requiring greater reserves for adaptation measures, or risk losing residents and revenues.
If this issue is left unaddressed, lenders will have little appetite for suing delinquent customers because the lenders will be left with flooded and worthless properties. Bankruptcy courts could face a tsunami of climate-impacted debtors, and local governments will be left with dangerous structures.
We must mitigate these approaching damages by getting smarter about lending.
One solution is a partnership among mortgage lenders, the federal and state governments, and consumer interests to develop mortgage relocation loans (MRL’s).
Devising new mortgage models includes understanding how indebted consumers can still maintain monetary relationships with those that funded the purchase of their homes and how Congress can provide incentives to both lenders and owners in the relocation process.
An MRL envisions that homeowners can deed their property to the government, which then issues funds payable to the original mortgage lender based upon asset value. In turn, the homeowner buys another property in a higher elevation area and obtains financing from the original lender. This would eliminate the risk of credit problems arising from a foreclosure. The original lender would agree to accept the value of the payment issued by the government as satisfaction of the mortgage.
Thereafter, government would obtain title to the property and use that land for natural coastal adaptation. This approach furthers public policy to discourage rebuilding with taxpayer funded bailouts in threatened coastal regions. A variation of this idea is discussed at Climigration.org.
Flooding waters do not care about bank accounts, credit ratings or investments. But society does and it’s time to start working to limit the damage flooding is going to cause in the decades ahead.
Mitchell A. Chester, Esq., is a climate activist.
“The Invading Sea” is the opinion arm of the Florida Climate Reporting Network, a collaborative of news organizations across the state focusing on the threats posed by the warming climate.