California, Insurance, the Fair Plan, and Money

I would be surprised if those homes in Southern California that have burned have paid enough premiums to insurance companies to cover their loss. But there’s reinsurance, right? The insurance industry is trying to react to the ongoing disasters fueled by the impacts of climate change, and it’s getting hard. The number of homes in the wildland-urban area rose from 30 million to 44 million from 1990 to 2020. One analysis found that a number of U.S. homes (17 million homes worth 19 percent of U.S. housing) were underinsured against floods or wildfires. At the low end, the base case estimate was $1.7 trillion worth of homes in serious danger. The worst case? $2.7 trillion in losses for the insurance industry.

Lenders and servicers are attentively watching the situation in California, just as we did the fires in Lahaina and storm damage in the Southeast. There has been some question about whether California’s insurer of last resort (the FAIR Plan) has enough cash on hand to pay for its share of wildfire claims. As surplus is inadequate and reinsurance has a deductible that exceeds available cash, an industry assessment is inevitable, per Fitch. “FAIR Plan [Fair Access to Insurance Requirements Plan] doesn’t have enough surplus for this level of loss, the biggest California wildfire loss to date,” said Gerald Glombicki, senior director at Fitch Ratings in an interview with Insurance Journal.

Meanwhile, California Governor Gavin Newsom announced commitments from Bank of America, Citi, JPMorgan Chase, Wells Fargo, and U.S. Bank. They will offer mortgage relief for property owners affected by the Los Angeles area fires: a 90-day forbearance on their mortgage payments, without reporting the payments to credit reporting agencies.

Assistance the financial institutions will offer their qualified borrowers 90-day mortgage payment forbearance, relief from mortgage-related fees accrued during the forbearance period, payment option plans without immediate repayment of unpaid amounts, opportunity for additional relief, and protection from new foreclosures or evictions for at least 60 days.

The financial institutions will not report late payments of forborne amounts to credit agencies

The relief will be available for qualified customers of the institutions who reside in Los Angeles County in the following zip codes: 90019, 90041, 90049, 90066, 90265, 90272, 90290, 90402, 91001, 91104, 91106, 91107, or 93536.

The Department of Financial Protection and Innovation will also be reviewing state-chartered financial institutions to secure additional commitments in the coming days. Of course, borrowers should contact their mortgage servicer to receive relief.