8.3.26 Early Information Access; Aon’s Jon Dickson on Flood Insurance; Market Stability

Robbie ChrismanWelcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topic on today's episode includes the power of receiving data early. The balancing act we saw last week between uncertain monetary policy and persistent geopolitical risks and my interview with Aon's John Dickson on the evolution of disaster modeling and how it's impacting the mortgage industry from origination through the capital markets. Here, take a listen, do a low preview. Robbie ChrismanCan you talk about the difference between the National Flood Insurance Program and private insurance? What are key differences for people to know? John DicksonWell, the the major difference is that the National Flood Insurance Program has, in some respects, a split personality. On one hand, it's supposed to be an effective risk transfer operation that provides affordable but supportable pricing so that it can manage risks long into the future. The other side of that personality is a social assistance program where it is providing insurance to people anywhere, everywhere. It doesn't say no to somebody. It doesn't say you are excluded from coverage, you don't qualify from coverage, you're going to be non-renewed for coverage based on the assessment of the risk. That's the biggest difference between the NFIP and the private market. Robbie ChrismanWho's going to say that information isn't important lenders and the markets like knowing what the U.S. Federal Reserve is up to? Now, Federal Reserve Chairman Kevin Warsh is considering reducing the frequency of the central bank scheduled policy meetings. The New York Times reported Friday. How much would you pay for news in advance? $100,000 per month, or it's hard to put a figure on it. Would you ever buy something from someone selling something that had access to media and technology groups, new subscription-based data service giving paying customers, which may include MBS traders, after real-time access to truth social posts from Trump and other high-profile accounts? It's called Truth API. The application programming interface is intended to provide businesses with a direct license, real-time fee to the platform's most market-moving truth. Trading firms and other subscribers can access the posts earlier than others for fees for up to $100,000 per month. Last week was quite a balance gap between increasingly uncertain monetary policy and precipitant geopolitical risk. Reinforced inflation concerns while the Fed has expected left rates on change. Rather than providing explicit forward guidance, emphasizes allowing markets to do much of the tightening themselves, resulting in a steeper yield curve, short-term yields declined modestly while longer-term treasure yields climb. What's the data suggesting about redirection? Well, it's been pretty mixed. Softer inflation, slower GDP growth, but firm wage growth and still elevated inflation expectations. It's done little to alter the view that the Fed remains firmly in a data dependent holding pattern heading into this week's employment report. Treasury markets stabilized after Wednesday's Fed-driven sell-off. Long-term yields pulled back monetary from reason highs, but remains elevated as investors reassessed the Federal Reserve's commitment to containing inflation. Mortgage markets also stabilized after recent volatility. Other borrowing conditions remained calming. Mortgage rates climbed to their highest levels in roughly a year, driving another sharp decline in mortgage applications and further dampening refinancing activity while specified pool performance improved selectively and dealer positioning became more balanced. For today's interview, I wanted to welcome to the show Aon's John Dixon to talk about the evolution of disaster modeling and how it's impacting the mortgage industry from origination to the capital market. Robbie ChrismanBefore we get into the insurance side of things, I'd heard that this year is going to be an El Nino year. Any any would you venture any predictions about what we're going to see from uh the hurricane front, and anything there? John DicksonMy non-scientific wow prediction is going to be, as we've seen in recent years, most of our flood losses, flooding events of scale are going to come from rainfall as opposed to coastal wind events. Robbie ChrismanI like that. That's a good prediction. When we look at the uh insurance landscape, uh maybe for people that aren't intimately familiar, if you bring them up to speed on the the NNFIP, its role in society versus private insurance, and just what we've seen with with premiums, with claims, with other figures, or any statistics you can provide about what's been going on here, trends recently, things of that nature. John DicksonTrends with the NNFIP. Um I think the NNFIP, first of all, has an incredible mandate. You think back to its inception, it's been charged with providing flood insurance to everybody everywhere, um, regardless of the structure that they built or that they they they own, uh regardless of their claims history, uh regardless of their lifestyle. Um that's not the way private industry works when it writes insurance. And so the NNFIP, like I said, has just this unbelievable mandate. And by the way, that mandate was initiated before we even had the computing power, the modeling power, the analytics power that we have today. You know, think about post-Hurricane Andrew, when devastation happens in South Florida, resets the entire wind market along the coast, you know, stretching from basically Brownsville, Texas, up into the Cape of Massachusetts. The modeling community came in and responded, but the effort to model that stretch of land that's about 20 miles deep around that that coastal um shape is a fraction of what it takes to model the whole country for flood. And yet the NNFIP was told to go and insure everything for flood insurance. Um massive undertaking, massive challenge. And it's it's been a rocky go for the NNFIP. Recently, with the advent of Biggert Waters and the Homeowners Flood Insurance Affordability Act, it's opened the door for private markets to step in, and private market's done an exceptional job of helping transition risks, um, provide better spread, better pricing, um, better risk management. But the NNFIP persists because we continue to have homes built where nature tells us homes don't belong. We continue to have homes that sit on the severe repetitive loss list. Uh we have homes that the NNFIP covers that the private market's just not willing to price or underwrite. And as long as that continues, the NNFIP is an essential component to risk management in the US. Robbie ChrismanNot to be so binary here, but with the evolution of the NNFIP, with the greater use private industry, are we moving toward better ultimate solutions or coverage here, or in your opinion, are we moving away from where we should be? John DicksonI think we're moving in the right direction. Like I said, the investments that are being made today around modeling capabilities, uh mapping resolution, uh just how we better harness data to make better decisions is vastly improved. And I think you're seeing the returns of that in more options available to property owners, better prices for better risks, better risk distribution, um, better performance across these portfolios. Uh you know, one simple uh measure is the number of capital markets entering into the flood space continues to increase. I mean, just 15, 20 years ago, you know, before the advent of bigger waters, the the private industry would tell you Perl was not insurable. Private market couldn't write it. The investments that have happened then till now have changed that conversation completely, 180 degrees. And now not only is it insurable, um, people are rushing in to find new ways to do it. And so the like I said, the investments, the innovation that's taking place today, are really helping people make better decisions today. Robbie ChrismanThe President's Council recently issued a report for reform of FEMA's national flight insurance program for financial stability and risk resilience. Can you talk about some of the assessment that was made and what we could see in practice as a result of it? John DicksonWell, I think the overarching finding when it comes to the NNFIP and that report was that the NNFIP as it's run today is not sustainable. And I don't know that that's robustly debated or disputed. I think that the path that the NNFIP is on requires ongoing reform. And in the review council output, some of the things that they recommended basically are things that you see happening in in other places on a smaller scale, particularly what I'm talking about, is like the depopulation of Citizens Property Insurance Corporation in Florida. Citizens balloon to be the largest source of homeowners insurance in the state, state-run insurance company, uh, the state said this is not the position we want to be in. It took them a while to figure out how to effectively depopulate citizens and return to a more robust property insurance marketplace. And like I said, it took a while, but those efforts seem to be working. There's new capital stepping into Florida to write homeowners at a greater velocity today than in recent times. And the FEMA Review Council took a similar view with respect to NNFIP. We need to find a way to de-risk the NNFIP, to invite more private capital to come in to take these risks, uh, to provide a more sustainable ecosystem for writing flood insurance. So I think that's a huge, huge recommendation with great benefit to homeowners throughout the country. A couple of ways they talk about doing that. One is making the NNFIP a clearinghouse so that you would use the NNFIP as a way to direct property owners to different private solutions in an effective manner. The second is a simple takeout measure where you have a panel of private programs that can come in and move risks from the NNFIP into a privately insured position. And I think the last piece that's that's of note here, they talk about the subsidization, risk rating 2.0, how the NNFIP operates. One thing that I find fascinating, risk rating 2.0 is a great step forward for the NNFIP. Very necessary change and allows the NNFIP to more effectively price at the risk level using models, uh using current analytics. And the NNFIP is the first to tell you that risk rating 2.0 removes pricing from flood insurance rate maps. They're no longer reliant on rate maps uh to determine the price to charge for a particular risk, particular structure, particular building person's home. But those same rate maps, the lenders are still required to use them to decide who must buy it or who must not buy it as a condition of a federally backed mortgage. And that disconnect, I think, is causing problems today. The NNFIP, because they're using risk rating 2.0, doesn't have quite the incentive that they had to maintain maps with current times. And yet lenders are using these maps many times, you know, a decade or more out of date to make a decision about somebody whether they have to buy flood insurance or not. It's it's it's using newspapers that are 15 years old to decide what the weather is going to be today. It's a poor mechanism, and I think that needs to change. Robbie ChrismanWell, let's offer practical solutions. I'm all for that. Anything, any things you think lenders could be doing differently or better, easy fixes, steps they can take today that that uh will help evaluate flood risk better, especially at a peak hurricane season. John DicksonThey're in a tough spot. The lenders are in a very difficult spot because if they want to be able to move mortgages they originate into the secondary market and have Fannie and Freddie and the GSEs pick up these mortgages, they have to follow very specific detailed servicing requirements. And the pieces around flood are intensely detailed. And so they don't have a lot of discretion uh when it comes to who must buy flood insurance in order for those mortgages to qualify for the secondary market. For the non-mandatory purchasers who is not required to buy flood insurance, one thing that would I think help the equation and I think accelerate the path we're on to closing that coverage gap is better educating property owners, agents, real estate professionals on the difference between mandatory purchase and risk of flooding. Too often uh we confuse the not required to buy uh with not at risk from flooding. And the two aren't one and the same. And we see this time and again with inland flooding, what's happening as a result of prodigious rainfall? Many times these are located in the so-called egg zones with the non-mandatory purchase areas. Water doesn't know to stop at these arbitrary lines drawn on maps, and that's where we need to continue the education, continue the conversation. Lower risk doesn't mean no risk. Robbie ChrismanOn the encouraging side of things, these maps are getting a lot better, correct? They're getting getting a lot more granular. There, there's a lot more detail in terms of, well, this property, this condominium unit on this side of the street is much more likely than the one on the other side of the street to flood. I believe that we're seeing that. Please correct me if I'm wrong. But ultimately, shouldn't that flow into better pricing for insurance? Shouldn't that flow into more accurate decision making? Or is that too utopian of a hope over here? John DicksonFirst of all, with respect to mapping resolution, you have it exactly right. You know, not even a decade ago, uh, we would be looking at mapping resolution that would have a 25, 30, 50 meter resolution, meaning that's that's as granular as you can get in square meters of those size. Big land area, and a lot can change over the cross of a 50 square meter parcel of land. And so today you see maps with resolutions as tight as three square meters. Uh in some places and in well-developed areas, uh very well-mapped areas, it can get as tight as one square meter. Very, very informative. And so to your second point, does that make a difference? Absolutely. 100% the better resolution, the better analytics, the better view you have of the risk of flooding, the better decision you can make about what the right price is and whether or not to buy insurance. And so, yes, uh, these tools are coming online. Uh, they are continually, they're evolving, uh, investments are continuing to be made in this space, and they're working. You know, we're we're seeing for for the business that we have the privilege to manage, we're able to see at a at a very granular level risk performance like we never have before, which allows us to think about new ways to bring capital to again help close that coverage gap. Robbie ChrismanWell, some best practices for counterparties interacting with one another here. We mentioned lenders, but you know, for an insurance provider or for a homeowner, like how how can we get to a better state of coexistence or understanding among one another? John DicksonWell, I think the property owner, the first question you have to ask yourself is what is the true assessment of eye risk? You know, I think of insurance as basically a mirror that can accurately reflect risk to again help you make a better decision about your family, your loved ones, your investments. If the mirror is distorted, you have a distorted view of what's at stake here. If the mirror is an accurate reflection of that risk, now you can make an informed decision that's going to best serve your near-term and long-term purposes. That's where we as an industry have to continue to work to remove the distortion from the reflections that we're showing people about what's at stake here if the worst were to happen. And I think the conversations are starting and I think they're continuing. And like I said, we're seeing inroads in some of these non-mandatory purchase areas, we're seeing tremendous growth rates of 20, 30% or more. The message is getting there. Listen, nothing sells like the weather. And so when you have a big event, you know, think about like Asheville that happened in the wake of last year's hurricanes. A mountainside town was flooded. We're starting to, the our eyes are starting to open up, we're starting to realize that it can truly happen anywhere. Robbie ChrismanAnything that you feel like is still being overlooked, people aren't paying attention to, there's a canary in the coal mine that you're kind of like, hey, this is something that needs to be talked about more. John DicksonI think one of the things that that we lose sight of, and it's it's a function of I I call it our instant access, you know, the news cycles that we enjoy today are incredibly fast, headlines are changing nearly instantly. We lose sight of what the recovery effort really looks like when disaster strikes. And particularly when it happens to communities where a vast majority of the victims of the event don't have coverage to accelerate the response, the recovery effort, the rebuild. You know, think about Hurricane Haleen that had a tremendous flood footprint in South Florida, on the west coast of Florida. The news shifted to Milton not that long after, and then other headline events began to occupy our attention. The folks who were impacted by that storm, there's some today that are still rebuilding over a year later. Switching gears from you know from flood to fire, you know, what happened in Altadena with the Eaton fire and in Palisades with the Palisades fire, those communities, by some measures, are barely 20-25% rebuilt. The recovery effort following these events is insanely long and intense. And I think we lose sight of that uh with the way that we consume information today. Robbie ChrismanVery good point there. John, ton of great stuff in here today. I really appreciate you making the time. Certainly valuable for listeners. Hopefully, we'll do this again soon. Thank you. John DicksonThanks for having me. Robbie ChrismanIt will be worth watching whether mortgage spreads can continue to recover as markets digest payroll data this week, evolving Fed expectations, and ongoing geopolitical development. July's employment report is expected to show the labor market remained broadly stable in July. Remember, a stable labor market provides room for additional tightening, so that inflation remains definitely high. Before that release, the week is packed with market-moving economic data, including manufacturing, housing, labor market, inflation, and business activity data. By the index of today, we'll see the final July S&P Global US manufacturing PMI, June construction spending, and July ISM Manufacturing Index. Before that volume of economic news, we begin the week with agency MBS prices, about a quarter in price better than Friday's close, the 10-year, excuse me, the two-year yielding 4.23, and the 10-year yielding 4.67 after closing last week at 4.75%, up 33 basis points over the course of July. Let's wrap up with a joke and housekeeping. On Saturday, the liquor store near me is increasing their price of vodka by a penny to $20 even. So on Friday night, I suppose all party like it's $19.99. Thanks to Figure for sponsoring this week's podcast. Figure is shaking up the lending world with their five-day HELOC, offering borrower approvals in as little as five minutes and funding in five days..