Insurers and Mortgage Providers Are Shifting Sea Level Rise Flooding Risk to Government-Run Programs and, Ultimately, Taxpayers

A recent article by Naveena Sadasivam published in Grist examines in-depth the way insurance companies and mortgage providers are shifting the risk from sea level rise flooding and other climate change-related disasters to government run insurers and, ultimately, taxpayers. This could have grave consequences for coastal real estate markets.

There are several mechanisms they’re using to unburden themselves of the risks, according to the Grist article. One way is for private insurers to abandon risky areas, leaving states with subsidized state insurance programs — such as California, Florida and Texas — to pick up the burden. Another way is for mortgage providers to make loans in high-risk areas and then sell them to Fannie Mae and Freddie Mac, which guarantee about 50 percent of the country’s $10 trillion mortgage market.

Unfortunately, many of the state-subsidized insurance programs are underfunded. If a natural disaster hits, they could go broke, leaving taxpayers to pick up the tab. The Fannie Mae and Freddie Mac mortgage programs are also at risk of being destroyed from disasters. If they fail, taxpayers will likely have to cough up billions of dollars in bailout money.

According to the Grist article, “Experts say if these climate risks are left unaddressed, the combined effects could ripple across the economy in ways that mirror the subprime mortgage crisis of 2007.”

Mortgage providers require buyers and owners to purchase flood insurance. If insurance becomes prohibitively expensive or unreliable, coastal real estate markets could lock up and property values could plummet.