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Improving Homeowner Outcomes After Natural Disasters

Professor Ken Klein

California Western Professor Ken Klein was recently invited to present on the intersection of mortgages and natural disasters at a Federal Housing Finance Agency (FHFA) Request for Information (RFI) on Climate and Natural Disaster Risk Management at the Regulated Entities.

The FHFA was established by the Housing and Economic Recovery Act of 2008 (HERA) and is an independent regulatory agency that ensures a competitive, liquid, efficient, and resilient housing finance market.

Professor Klein, who was recently reappointed as a National Association of Insurance Commissioners (NAIC) Consumer Liaison Representative for 2021, is a recognized expert in the intersection of homeowner insurance and natural disasters.

One of several presenters, Professor Klein’s RFI presentation, entitled “Possible Ways to Improve Homeowner Outcomes after Natural Disasters” focused on what occurs post-disaster.

“I am a natural disaster survivor, so my presentation came from a unique perspective, and that is getting people back home rather than on managing harms to financial institutions when people can't get back home,” said Professor Klein.

Professor Klein went on to talk about the two primary challenges homeowners face after a natural disaster—time and money.

“Homeowners don’t always realize that insurance companies put a time limit on paying claims, usually one to two years,” said Klein. “Reconstruction in a natural disaster zone can take double that amount of time.”

In his presentation, Professor Klein talked about the FHFA being an agent of change in the content of standard Covenant 5 in each of the state-specific templates for Fannie Mae and Freddie Mac’s deeds of trust.

“There are two changes that could be made to Covenant 5 that would have a far-reaching impact,” said Klein. “First, in the wake of a declared natural disaster or emergency, mortgage-compliant insurance has to keep all coverages open for a minimum of three years. Second, that insurance is not allowed to exclude flood or any other natural disaster peril from the required hazard insurance.”

Next, Professor Klein talked about one of his areas of expertise–underinsurance and the huge problems associated with that.

“Most homeowners actually want to be fully insured,” said Klein. “But they often end up paying for inadequate coverage thinking they are fully insured. Only when a disaster happens do they learn that their coverage is short by quite a lot.”

Again, Professor Klein recommended that Covenant 5 be adjusted to address this issue by providing that mortgage-compliant insurance include an estimate of full reconstruction costs. Subsequently, if the homeowner purchases coverages in that amount, then the insurer has to bear the cost of any error of greater than 5 percent.

Professor Klein was among those invited to submit detailed written evidence by April 19, 2021.

“It is my hope that the FHFA will use its authority to improve outcomes for climate change survivors of natural disasters such as wildfire or hurricane,” said Klein.

Video of Professor Klein’s presentation, together with all the presentations given at the FHFA RFI, can be viewed here.