MICHEL MARTIN, HOST:
We've seen ample evidence of the human suffering caused by flooding and wildfires in places like California and Florida, the emotional trauma and the financial devastation. But Federal Reserve Chair Jerome Powell told the Senate Banking Committee recently that an exodus of banks and insurers could make it even worse.
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JEROME POWELL: You know, if you fast forward 10 or 15 years, there are going to be regions of the country where you can't get a mortgage. There won't be ATMs. You know, the banks won't have branches and things like that.
MARTIN: Is he right? We're going to get additional perspective on this from Ben Keys. He is a professor of real estate and Finance at the Wharton School of the University of Pennsylvania. Professor Keys, thanks so much for joining us.
BEN KEYS: Thanks so much for having me.
MARTIN: So let me start with insurance in places like Los Angeles, which has just experienced these terrible wildfires, or coastal Florida. I think most people know that insurance premiums have skyrocketed in many places, especially places like that. Insurers are pulling out of some places that are considered at climate risk. Is this at a level that you would consider a crisis?
KEYS: It is a crisis for many homeowners. It's difficult to find private insurers who are willing to write policies in many of these areas. My research has shown that premiums have risen by more than 50% in some of the highest-risk zip codes in the country since the start of COVID. So this is a real challenge for homeowners, and it's becoming a difficulty when it comes to their pocketbooks.
MARTIN: So what does this have to do with our ability to get a mortgage?
KEYS: Yeah, well, in order to get a mortgage, you basically have to have an insurance policy attached to it. Most mortgages are sold by lenders and then securitized into a mortgage-backed security system. And for the mortgage to make its way through that chain, it effectively needs to be bubble wrapped with an insurance policy that's going to protect the holders of that risk. And so you really can't get a mortgage without insurance policy. And taking it one step further, it's really difficult to buy a house without a mortgage.
MARTIN: In Florida, even before Hurricanes Helene and Milton last year, some homeowners had just one option. This is the state-backed nonprofit Citizens Property Insurance, an insurer of last resort, you know, as it were. And then California had an insurer of last resort, which just ran out of money. It was bailed out. But is it just likely then that the federal government is going to step in in these places?
KEYS: I think at the moment, we have a system of 50 state regulators that are regulating the insurance market in a very fragmented and inconsistent way. And most states now have created their own insurers of last resort as a Band-Aid on a system that is now far overstretched.
MARTIN: So that's what's so interesting about this, because the mortgage market in the United States is dominated by these government-backed entities, you know, Fannie Mae, Freddie Mac, the FHA, right? And then I guess the VA, too. So given that the federal government already plays such a big role in mortgage finance and mortgage credit, does the direction seem to be moving that the federal government would then have to be involved in insurance as well? And what's interesting about this is that there's a move to privatize these entities.
KEYS: You've put your finger on the big question at the moment, is how do we reconcile state-level regulation of insurance and the enormous federal role in the mortgage market? The beneficiaries of insurance are so dominantly these federal entities at the moment. The other tension is insurance policies are just for one year. But the mortgages that those entities you mentioned are insuring, are guaranteeing, last for 30 years. And so reconciling those two things becomes a big challenge when one of those two entities is especially stressed.
MARTIN: The fed chair was clearly sounding the alarm. But what is he sounding the alarm about? What would you say?
KEYS: Well, I think he's raising the profile of climate risk. I think as we're looking at the upcoming years, there is going to be a large push to privatize Fannie Mae and Freddie Mac. And the ways in which those entities think about pricing climate risk is going to be a major question on the table. I think more generally, he's raising a big red flag going forward that we need to think much more carefully about where we live, where we build and how we invest in infrastructure and the built environment in the face of rising climate change.
MARTIN: That's Ben Keys. He's professor of real estate and finance at the University of Pennsylvania's Wharton School. Professor Keys, thanks so much for talking with us.
KEYS: Thanks so much. Transcript provided by NPR, Copyright NPR.
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