Earthquake Risk to Mortgage Markets

A California earthquake would accelerate the U.S. mortgage meltdown and send shockwaves through the financial and insurance industries, according to a new study from Aon Benfield. The Annual Global Climate and Catastrophe Report: 2008 highlights that the lack of mandatory earthquake insurance in California would result in high levels of mortgage defaults should an earthquake occur. It makes the point that Freddie Mac and Fannie Mae never required homeowners to purchase earthquake insurance for their properties. Approximately 86 percent of Californian homeowners do not have earthquake coverage, despite most of them having mortgaged their homes. (Note: the 1994 Northridge earthquake cost the mortgage industry up to $400 million in mortgage defaults due to foreclosure expenses, property repair costs, lost interest income, write-downs of existing loan balances and other administrative costs.) Given the current housing environment in the Golden state, the study says a potential earthquake would have long-lasting damaging economic effects, as many homeowners walk away from their damaged homes without repairing them, leaving many homes in foreclosure and forcing banks to bear the brunt of the loss in capital. The loss of home ownership could also adversely affect the insurance and reinsurance industries, as incoming capital on homeowner insurance policies would be severely diminished. Check out I.I.I. facts & stats on earthquakes.

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