The growing crisis in the insurance industry may make it hard to get a mortgage in parts of the country in the coming decades, Federal Reserve Chairman Jerome Powell said on Tuesday.
“If you fast-forward 10 or 15 years, there are going to be regions of the country where you can’t get a mortgage,” he said during his semiannual testimony to Congress, noting that banks and insurance companies have been pulling out of coastal and fire-prone areas they deem too high risk.
Insurers have been canceling policies across the country as climate change intensifies natural disasters, saddling them with multibillion-dollar losses. State Farm, for example, canceled thousands of policies in the Pacific Palisades neighborhood of Los Angeles months before it was devastated by wildfires.
Because mortgage lenders typically require homeowners insurance as a condition of making a loan, prospective buyers with few alternatives are increasingly purchasing coverage from state-designed insurers of last resort, which can have higher premiums and skimpier coverage than traditional alternatives.
Banks and insurers won’t keep making loans or providing coverage when faced with evidence of disasters, Powell said in response to a question from Minnesota Sen. Tina Smith.
Questions about high housing costs came up repeatedly throughout Powell’s testimony. The Fed chair reiterated that interest rate normalization may help buyers in the years ahead, but much of the problems with affordability boil down to a lack of supply, an issue outside of the Fed’s purview.
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“There’s a short-term problem that will go away in the coming years, but there’s a longer-term problem with housing affordability, and that’s going to be something that’s not within our authorities or powers to affect,” Powell said in response to a question from Sen. Ruben Gallego.
Even if rates do fall, Powell said it’s “not obvious” that lower rates would slow housing inflation because demand would likely rise.
“It would unlock people’s low mortgages, but that creates both a buyer and a seller,” Powell said. “It’s not clear that that would be something that would drive down housing inflation.”
When asked about the future of Fannie Mae and Freddie Mac, Powell said that the government’s backing of the mortgage giants “does hold down mortgage rates.” He said releasing them from conservatorship was ultimately a question for Congress, adding that “putting housing finance back in the private sector has some appeal over the longer run.”
