The insurance industry is facing mounting challenges, and this could make securing a mortgage difficult in certain parts of the country in the years to come, according to Federal Reserve Chairman Jerome Powell. During his biannual testimony to Congress on Tuesday, Powell highlighted that within the next 10 to 15 years, some regions might become mortgage deserts. This reality stems from banks and insurance companies that are increasingly withdrawing from coastlines and fire-prone zones they consider too risky.
As climate change ramps up the frequency and intensity of natural disasters, insurers find themselves grappling with enormous losses totalling billions of dollars. Take State Farm, for example, which decided to cancel numerous policies in Los Angeles’s Pacific Palisades right before wildfires swept through the area. These actions have a cascading effect on the housing market. Mortgage lenders, who usually insist on homeowners insurance before approving a loan, leave potential buyers with limited options. This situation forces many to turn to state-backed insurers of last resort. While these insurers provide necessary coverage, their policies often come with higher premiums and less comprehensive protection compared to traditional options.
Powell emphasized that faced with concrete evidence of looming disasters, financial institutions are unlikely to continue issuing loans or offering insurance products. This perspective came in response to inquiries from Senator Tina Smith of Minnesota. Throughout Powell’s testimony, the high cost of housing was a recurring issue. While Powell suggested that normalizing interest rates could offer some relief to buyers in the years ahead, he pointed out that the core of the affordability problem lies in a deficit of available homes—a matter beyond the control of the Federal Reserve.
He further elaborated that although the present challenges might ease in the short term, the long-term issue of housing affordability persists, and unfortunately, it falls outside the Fed’s regulatory reach, as he explained to Senator Ruben Gallego. Even if interest rates were to decrease, Powell cautioned that it’s not a given that this would curb housing inflation, as the resulting uptick in demand might counter any potential benefits.
Reducing rates might unlock currently low mortgage contracts but at the same time generates both a buyer and a seller, leaving its actual impact on housing inflation uncertain. On the topic of Fannie Mae and Freddie Mac, Powell noted that government support helps keep mortgage rates low. However, the question of their release from conservatorship remains a matter for Congress to decide. Transitioning housing finance back to the private sector could prove advantageous in the long run, he added.
