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This is a special episode of “How We Survive” devoted to you, dear listeners. We’ve been getting some smart questions in our inbox. So we’re taking this opportunity to answer as many as we can.
You wanted to know: “Who the hell loans these people money for mortgages” in risky coastal areas? Who ultimately owns the risk? Plus, do certain investments, like REITs, drive gentrification (and what is a REIT, anyway)? And finally, we tackle an old question with a new twist: to rent or buy in the era of climate change.
In this episode, we get into the wild world of mortgage lending (spoiler alert: It’s messy). Also, how the National Flood Insurance Program works and why it’s a very big deal! And we’ll tell you how to find the most resilient places in the U.S.
Season 2 of “How We Survive” follows the money to the end of the world. In this case, South Florida.
New episodes are out every Wednesday. Be sure to follow us on your favorite podcast app, and if you enjoy the show, tell a friend.
How We Survive Season 2 Ask Amy Anything Transcript
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Amy Scott: Hey, everybody, it’s Amy. And this is a very special episode of How We Survive, devoted to you, our listeners, we’ve been getting some really smart, interesting questions in our inbox. So we’re spending this episode answering as many as we can. First up, a few of you had questions about money, specifically the money that keeps people living and building in risky coastal areas.
Brian: Brian here from Lakewood, Colorado. I just got done listening to season two, episode one. And I literally found myself yelling at my computer monitor about who the hell loans these people money for their mortgages. I suppose there’s some sort of elaborate system in place that insulates mortgage companies from these risks, but that’d be a fun one to untangle. But hey, maybe you’d like to prove you’re the best hazard podcast on the internet and explain this one to the masses.
Amy Scott: Okay, we love a challenge. To help us answer this question. I called up one of my go-to sources on housing finance. His name is Ben Keys. And he’s a professor of real estate and finance at the Wharton School. Here’s the short answer.
Ben Keys: So banks continue to lend in risky markets, in large part because they’re not bearing those risks directly. They’re passing those risks on through Fannie Mae and Freddie Mac to the federal government who insures the loans.
Amy Scott: So yes, Brian, there is an elaborate system in place that insulates mortgage companies from these risks. Basically, when banks and other lenders make loans to homeowners, they don’t typically hold on to those loans. These days, about half of mortgages end up being sold to one of two big government backed entities, Fannie Mae and Freddie Mac, so that lenders can turn around and make more loans. So Fannie and Freddie are the two big engines that keep the housing market moving. And they don’t hold on to all those loans. Either. They bundle some of them up into what are called mortgage-backed securities that are traded by investors. But Fannie and Freddie still insure the underlying loans. So if a homeowner stops paying and defaults on a loan, say because their home is wiped out in a hurricane, it’s not the bank that’s on the hook for the losses or the investors. It’s Fannie or Freddie.
Ben Keys: So banks are originating a loan and very quickly selling it on to investors, who are protected from default risk. And so it’s really the insurance that’s being provided by Fannie Mae and Freddie Mac that’s allowing mortgage credit to continue to flow to these at-risk neighborhoods.
Amy Scott: So then why are Fannie and Freddie continuing to buy these mortgages? On the coast where there’s tremendous risk?
Ben Keys: Yeah, I mean, it’s interesting. So thus far, the research has shown that Fannie and Freddie haven’t sustained all that large of losses in the face of disasters, and they’re protected from this risk in a couple of ways. One is the National Flood Insurance Program.
Amy Scott: That’s the federal program run by FEMA that provides government subsidized flood insurance to homeowners in flood prone areas.
Ben Keys: So that program has subsidized coastal living for a long time in the US, and their insurance policies have historically been dramatically underpriced. So it meant that you could get very cheap insurance for even the riskiest properties. And that’s protected lenders and Fannie Mae and Freddie Mac.
Amy Scott: Ben says other federal programs, like disaster loans for small businesses and FEMA grants, have also insulated Fannie and Freddie for mortgage losses from a big storm or flood.
Ben Keys: So the losses just haven’t been there for Fannie and Freddie at a large scale. And that’s allowed them to be willing to take on these risks up to this point.
Amy Scott: But Ben says that willingness may be showing some cracks.
Ben Keys: They’re very aware of these concerns. They’ve formed internal groups to study climate risk. And it’s something I’ve presented my research to. So I’ve, I’ve been in conversations with those groups. And I think it’s something that they’re very aware of, that this is a growing risk, and that it should materially affect their portfolio in the coming years.
Amy Scott: Now, not all mortgages are financed by Fannie and Freddie. For one thing, they won’t buy loans above a certain amount for those really expensive coastal homes. Ben says some of those loans are also packaged up and sold to investors, which can spread the risk.
Ben Keys: And some of those loans stay on the bank’s balance sheets. And you could think of this being both the big lenders who have some of these loans on their balance sheets, the Wells Fargo’s and Bank of America of the world. But this is also some local lenders. So this might be a local credit union or some other lenders that have some exposure to this local risk. So there’s a combination there. I think that is an area of concern for those lenders that they, that they may see a direct climate related shock to their balance sheet.
Amy Scott: So bottom line, there is a complicated system that enables banks to keep lending money to people living on the coast, generally supported in some way by us, the taxpayers. But that system is going to have to change as those risks and the losses grow. So did we win? Best hazard podcast? All right, Eva had a question about the Little River episode. She writes, when people invest in REITs, are they investing in companies like Miami Soar? Great question. Remember, Miami Soar is that group of investors that’s buying up property in Little River. REIT stands for Real Estate Investment Trust. And according to the SEC, there are companies that own and typically operate income producing real estate or related assets. A lot of REITs are actually public companies that are traded like a stock. And for some investors, Ben says REITs are a good way to take part in the real estate market without actually owning or taking care of a property.
Ben Keys: Yeah, REITs tend to be fairly stable portfolios that are mostly making their money from renting out the space in the buildings. And REITs run the gamut from multifamily apartment buildings to single family rentals, to office buildings, to some other quirkier sectors like a REIT that just manages cell phone towers or a REIT that is investing in warehouses where there’s growing cannabis. So there’s a huge spectrum of REIT investments that are out there for people.
Amy Scott: Now, Miami Soar wouldn’t talk to us. But from what we can tell, they don’t seem to have a REIT that shareholders like you, Eva, could invest in. But – and I think this might be behind what Eva was asking about Miami Soar – Ben says REITs can contribute to the affordability crisis by buying up single family homes to rent out for income.
Ben Keys: And as the pendulum of mortgage access and credit availability has swung away from homeowners over these last 10 years, we’ve certainly seen a lot of investors step in to the breach. And so I think what we’re seeing now is, you know, institutional investors are one more pressure point for potential homebuyers. It’s hard to suss out exactly how much of the price pressures and growing affordability are due to institutional investors. But, you know, having one more competitor, who’s there to bid up the price surely isn’t helping the average family access their first home.
Amy Scott: Speaking of someone trying to buy their first home, our producer Hayley had a question.
Hayley Hershman: Yes, hello. Okay. So I’m a struggling renter. And I’m wondering, in the age of climate change, does it make sense to invest in a house, like to buy a house at all? It just seems like an increasingly risky thing all around.
Ben Keys: Yeah, I think it does add one more layer of risk to the homeownership proposition and the sort of own versus rent trade off. I think that homeownership is still very heavily favored by the tax code, and gives you a set of opportunities that you simply don’t otherwise have.
Amy Scott: Opportunities like painting the walls whatever color you want, access to resources, like a well-funded school system, and equity you can build over time and tap if you need it.
Ben Keys: The basic intuition that I like to go off of is, you know, if you’re going to stay in the same place for more than five years, you can start thinking about spreading out some of those fixed costs of homeownership, like paying realtor fees, or transfer taxes, locking in your monthly costs, which is really nice in a world where rents keep skyrocketing, especially in expensive markets. And so I think homeownership makes a lot of sense for people who are facing rising rents and also who are planning to stay put for some time. But I think, you know, to your point, climate change needs to be a part of that calculus. It needs to be on the list of, you know, the risk premium that’s associated with being a homeowner,
Amy Scott: Buying a house is often considered a good way to build wealth over time, that can be passed down to future generations. But homeownership can also be really expensive. You’re on the hook for all the upkeep, like when the roof leaks or the hot water heater breaks. And the threats of climate change are yet another expense. I mean, we’ve already seen how flood and wind insurance are getting more expensive for homeowners. And as we talked about earlier, if wildfires or extreme heat or intense hurricane seasons drive people away from certain places, home prices in those areas could drop, and whoever is left with a mortgage at the time could lose out. Big.
Ben Keys: So I think all these things should weigh into the decision making process. And I do still think that homeownership is right for a lot of people, but they need to consider it carefully when weighing the pros and cons.
Hayley Hershman: I was just really hoping you were gonna be like, No, just rent forever. Like, it’s fine.
Amy Scott: Well, I have a different perspective to offer here.
Ben Keys: Yeah, go ahead.
Amy Scott: Which is during the pandemic, we saw that homeowners generally came out ahead in every way. They got a massive forbearance, so they didn’t have to pay their mortgage payments, for a really long time. Renters got some eviction relief, but it wasn’t the same across the board. And, and people were still being illegally evicted. Also, they saw their home values just go up and up and up as the housing market tightened. And that was all this wealth that renters weren’t getting. And so – and also just the stability of homeownership during an unstable time. I realized that climate affects that, but I’m thinking if there’s a climate disaster in an area, what always happens? The rents go up, because there’s more demand for housing. And so, I don’t know, put that in your like pros column, maybe?
Ben Keys: Well, yeah. I mean, you layer on top of that, that the vast majority of homeowners who could refinanced when interest rates were at record lows. And the main explanation for what’s going on in the housing market right now, is that everyone is sitting tight on an interest rate below 3% and no one wants to move. And so that’s why you can get interest rates rising so fast, and yet, prices not collapsing in the face of that. It’s because everyone’s locked in these super low interest rates. And so everyone’s sitting tight. And that means there’s very few homes for sale, and when there are few homes for sale, prices can stay incredibly high for a long time. So I think, you know, if you’re patient, you know, then the markets are going to thaw out eventually. But that said to your point of, you know, you wish that I said just rent forever, renting forever is an option.
Amy Scott: But here’s something to think about if you do remain a renter.
Ben Keys: What do you do with the money that you would have been tied up in your down payment, right? So if you can be disciplined enough to set money aside the same way you would be if you were putting it towards a mortgage and paying down the principal, then I think you can do really well by having a diversified portfolio on the side and you may be able to build wealth just as well.
Hayley Hershman: Well, this was partially very validating. So thank you. I appreciate it.
Amy Scott: Partially?
Ben Keys: I’ll take partially validating any day of the week. Partially validating.
Amy Scott: Okay, now that Hayley is filled with dread about whether she’ll ever buy a house, let’s move on. We talked about flood insurance and how it protects lenders from bearing a lot of the risks of climate change. Well, we got a bunch of questions from listeners about flood insurance, like should more people be required to have it? So I called up the former chief executive of the National Flood Insurance Program Roy Wright. These days, he’s working in the private sector, as the CEO of the Insurance Institute for Business and Home Safety. You probably remember them from Episode Four.
Roy Wright: I have long held that there’s a very easy way in places like Florida, to know whether or not you need flood insurance. So I tell you, pull out your driver’s license, if the word Florida appears across the top, you need flood insurance.
Amy Scott: Okay then, sounds simple enough. But the truth is, most people don’t have flood insurance in Florida or the rest of the country. Just 18% of Florida homes are covered by a flood insurance policy. Nationwide, just 12% to 14%.
Amy Scott: So why do so many people not have it?
Roy Wright: You know, I think there are a couple of reasons why people don’t have flood insurance. First of all, they don’t want it to be true. They don’t want the fact that they’re at risk of flooding to be true. And so something around avoidance or ignorance leads us down that path.
Amy Scott: Sound familiar from the Miami Real Estate episode? Denial is a very powerful force.
Roy Wright: Secondly, I mean, this is real, there’s a cost, this affects your budget. And people can oftentimes – because they are at a high level of risk for flooding, can see insurance premiums for just the flood portion at $1,500, $2,000 or $3,000 in each year.
Amy Scott: Plus, even if you have flood insurance, you could still face some pretty high costs in the event of a disaster. That’s because the National Flood Insurance Program has a cap.
Roy Wright: Right now FEMA only gives $250,000. Congress set that $250,000 cap in 1994.
Amy Scott: Between inflation and the wild Florida housing market, that doesn’t go very far in 2022.
Roy Wright: If you want more coverage than $250,000, you have to go buy it on the excess and surplus market. You have to be sophisticated and go, I want layered insurance in this space. But this under-insurance piece is going to really begin to haunt us.
Amy Scott: Especially in the aftermath of Hurricane Ian earlier this fall.
Roy Wright: The price of rebuilding is going to exceed $250,000. For thousands of these homes that were destroyed, there’s gonna be a lot of people disappointed. People who had insurance thought they had protection, who are seeing damages that exceed that. And at that point, the only place you could look to is Congress, they set it and they’ve chosen not to move it.
Amy Scott: Listeners also wrote to us with questions about FEMA’s flood maps. If you’re not familiar, the maps show you how likely it is that an area will flood and can determine whether you need flood insurance to qualify for a mortgage. Historically, FEMA has updated its flood maps about every five years or so. So let’s say you bought a home a few decades ago that wasn’t in a high risk flood zone, but now according to the most recent maps, it is. Is there any help for homeowners who didn’t sign up for that much risk?
Roy Wright: FEMA has a long-standing program called the flood mitigation assistance program that helps pay the cost to elevate homes or acquire them. Congress put a significant amount of money into this over the next five years, they added $3.5 billion. To qualify for that you need to yes, be in the highest area of risk, and you’re not going to get prioritized unless you’ve experienced flood loss. But it doesn’t matter if you used to be out and are now in, as long as you are in and experiencing flood loss, you would be eligible and then it is a competitive process about where those dollars are going to go.
Amy Scott: We talked about this in the episode about the Florida Keys. Key West’s own sustainability official Alison Higgins had just been turned down for a grant to elevate her home. There’s a lot of demand.
A few of you wrote in wondering about your flood risk. We’re looking at you, Laura in Tampa, and Kevin in St. Cloud, Florida. So a quick plug for Risk Factor. You can go to risk factor dot com. Enter almost any address in the country and find out its potential exposure to floods, fire and extreme heat. Just maybe sit down. It can be sobering. This final question came from a bunch of listeners, versions of where is safe. Honestly, I think all of us have been asking this question as we’ve reported this season. Here’s listener Shirley in Honolulu.
Shirley: For those of us thinking about where we should move in 20 years or so, or where we should buy a fallback property, which are the climate friendliest cities in the United States?
Amy Scott: Great question. Nearly 40% of Americans live in coastal counties facing sea level rise. And a lot of us who don’t are worried about wildfires and droughts and flooding. So where should we go? There are a lot of lists out there on the internet. But the EPA has something called a Cumulative Resilience Screening Index, CRSI. It scores every county based on a variety of factors, like exposure to about a dozen different kinds of disasters and natural hazards. Also how well local governments might respond. It takes into account infrastructure and housing and the built environment. Okay, lotta numbers coming at you.
The highest scoring state was Alaska, with a 57. Kodiak Island in Alaska had the highest resilience score in the country, 189. Just for context, the national average is about 4.3. Maine also scores pretty well, especially a place called Hancock, which is right on the water, interestingly. Vermont’s not too bad. The South, I’m sorry to say, does not fare well. The region was well below the national average with a score of 1.4. Florida doesn’t do so well, either. Miami Dade County also got a 1.4. Some other places with higher-than-average scores, Maui Hawaii, Chickasaw Iowa, and Daniels Montana. Anyway, there are hundreds of scores, you can check out if you’re interested. But the sad truth is, nowhere is totally safe from the climate crisis. We spent time this summer with Caroline Lewis, an educator and founder of the CLEO Institute in Miami. She says she gets versions of this question a lot. Where is safe? Or the inverse, I live in a safe place, so I’m good, right?
Caroline Lewis: I tell people all the time when I do – we do these climate 101s everywhere, and they go, I’m so lucky. I live in North Carolina. I’m not worried about it. I said, if you are happy where you are, because you think you’re safe from the worst impacts of climate change. Guess what? We’re all coming. So get ready for an onslaught. Because any area that is inland high ground, and not vulnerable to food and water vulnerability, or heat and health, we’re all going to go there. So the changing populations is what I think we have to be ready for.
Amy Scott: Where will you go, if you leave Miami?
Caroline Lewis: We have a list. I’ve been making a list of places we could maybe live in. The truth is I don’t want to leave Miami. I want to stay here as long as possible, and as safely as possible. I really do. But I’m realistic. So definitely moving up to the Mid Atlantic area where my daughter is, is an option for us. Because if I have a grandchild, I will be the best yaya in the world. I will just be eating that child up. You’re in Baltimore, you said? You’re in a good elevation.
Amy Scott: Yes, we are.
Caroline Lewis: We might come by you then.
Amy Scott: Yeah, come!
Amy Scott: Actually, I looked up Baltimore. Not a great score, I’m sorry to say. But you’re welcome here anyway. That’s it for this episode. And thanks so much to everyone who wrote in. There were a lot of questions we didn’t get to. But don’t be disappointed if you didn’t hear yours. We might just answer it in a future episode. Like this one from Dave.
Dave: I’m wondering at what point do reinsurance companies start exiting the Florida marketplace? These companies are deep into risk modeling, and it would seem like the risk in a 30-year mortgage is increasing. So at some point it’s going to get too high, and then I’m wondering what happens then.
Amy Scott: Who insures the insurers? That’s next time on How We Survive.
If you haven’t already, please rate and review the podcast. It really helps us out. How We Survive is hosted by me, Amy Scott. This episode was a joint production by Hayley Hershman, Grace Rubin and our Senior Producer Caitlin Esch, with production help from Olivia Zhao. Our editor is Jasmine Romero. Sound design by Chris Julin and audio engineering by Brian Allison. Our theme music is by Wonderly. Donna Tam is the Director of On Demand. Francesca Levy is the Executive Director and Neil Scarborough is the General Manager of Marketplace.