The state has seen major companies step out of the market in recent times
A request last week by State Farm, California’s largest insurer, to ramp up its homeowners’ insurance rates has shone the spotlight on a growing crisis in that state over the cost of insuring a home.
The company requested a 30% increase in homeowners’ insurance, 52% for renters and 36% for condo owners, according to the San Francisco Chronicle, having already announced last year it would not be renewing tens of thousands of homeowner policies.
With other prominent insurers, including American National, withdrawing from the homeowners’ insurance space in the state, finding an affordable solution is a “major issue and challenge” for homebuyers – particularly those in greener, less urban parts of California, according to a top mortgage broker.
Damon Germanides (pictured top), co-founder and broker at Insignia Mortgage, told Mortgage Professional America that making clients aware of the issues they might face trying to secure homeowners’ insurance was a crucial consideration at the beginning of the mortgage process.
That’s because skyrocketing home insurance costs can, in some cases, put the application itself in danger. “We get on it early on in the loan process because we don’t want the client to have sticker shock when they get their insurance quote, or it could jeopardize the loan because the traditional underwriting matrix for insurance doesn’t work anymore,” he said. “In [certain] areas, they’re five times higher, sometimes, than what you’d expect.”
A borrower could even lose their approval if they’re not aware of what their insurance will cost, he said, because a quote of one or two hundred thousand dollars – as opposed to the expected $30,000 or $40,000 – could severely impact their debt-to-income ratio. “You might have just blown up your deal,” he said.
Solutions aren’t necessarily easy to come by, especially with insurance companies continuing to pull out of the state as the crisis mounts. Germanides said his team had put together a group of “very high-quality” insurance brokers who are sometimes able to get a better policy in place for borrowers.
Top of mind, he said, is making sure borrowers tackle the issue as early in the mortgage process as possible – ideally immediately after sending the loan application and other information. That’s been a key priority for realtors, too. “Everybody’s advocating applying very early for your insurance, starting to get your quotes going, and seeing what could be done,” he said.
Kris Radermacher from K2K Mortgage in Florida discusses the escalating homeowners’ insurance costs and property taxes, which are compounding affordability challenges for residents.https://t.co/UbzBuEvcGB
— Mortgage Professional America Magazine (@MPAMagazineUS) June 20, 2024
How did California’s homeowners’ insurance crisis begin?
The issue has begun to fester in recent years amid challenges caused by climate change and extreme weather, with thousands of homes across the state ravaged by wildfires.
Those fires – in addition to higher reconstruction costs due to inflation and soaring reinsurance prices – were cited by leading insurers as major factors in their decisions to pull back from the California market.
Germanides said buyers started to notice “mind-blowing” quotes for homeowners’ insurance coming in last year, with the problem continuing to mushroom as an affordable arrangement becomes less and less common.
California’s state insurance department has revealed a plan in recent weeks aimed at addressing the home insurance crisis and bring a measure of relief for homeowners, with its so-called “sustainable insurance strategy” billed at attracting more insurance companies to the state.
That would see companies commit to writing policies for a set number of homes in regions where wildfire risk is greatest, with those firms in turn permitted to use “catastrophe modeling” to predict potential losses.
A similar crisis has also been reported in Florida, where large insurance companies are increasingly turning away from the state amid a complex and fraught landscape for insurers.
Affordability crunch worsens amid mounting crisis
While the problem in California is most acute for the largest purchases, where insurance costs can be “astronomical,” it’s a matter that’s arisen across the board, he added, with even more affordable home purchases impacted by significant spikes or even cancellations of their policies.
It’s also a reason non-QM mortgages have become increasingly common in California, according to Germanides, because those mounting costs have pushed affordability even further out of reach for many buyers. “What the insurance speaks to is why these non-QM loans are doing well, too, because the overall cost is higher on everything,” he said.
“You might have to have a little bit wider of an underwriting box, within reason, for a client to get qualified for a home loan. So that’s where we’re seeing a big uptick in these kinds of deals.”
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