Why are homeowners seeing home insurance premiums increases of up to 70%, as David has? What can you do if your insurer drops you, you get a huge premium increase, or you can no longer afford coverage?
Topics covered include:
- What are the primary drivers of home insurance price increases
- Why these increases don’t show up in the U.S. consumer price index
- How the reinsurance market works and why reinsurers are passing on 50% premium increases to property and casualty insurers.
- What percentage of home insurers self insure
- What else can homeowners do
Show Notes
The crippling home insurance crisis hitting America by Rana Forhoohar—The Financial Times
The Hidden Driver of Soaring Home Insurance Costs by Jean Eaglesham—The Wall Street Journal
When Disaster Strikes: Preparing for Climate Change by Seán Nolan and Krishna Srinivasan—IMF Blog
Homeowners Perception of Weather Risks 2023 Q2 Consumer Survey—Insurance Information Institute
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Transcript
Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 481. It’s titled “How to Navigate the Crippling Home Insurance Crisis.”
Getting a Mortgage
In the fall of 2020 LaPriel and I tried to take out a mortgage for a house we wanted to purchase. We hadn’t had a mortgage in over a decade, but 30-year mortgage rates were less than 3%, so the offer was too good to pass up. We started working with a mortgage broker that was recommended by our realtor in Phoenix, and the whole process went on for months, and we never got a mortgage.
We never gotten an approval. It turns out that the agencies in the US that purchased most of the mortgages and packaged those mortgages into mortgage-backed securities or bonds, they changed the rules, added new requirements for the self-employed, because of the pandemic. They wanted to make sure that self-employed people still had income to pay their mortgages.
Because 70% of home mortgages in the US are bought by Fannie Mae and Freddie Mac. Those agencies guarantee the mortgages that are packaged into these bonds. So if there’s a default on the mortgage, these agencies, which are owned by the US government at this point, have to basically make up the default, or any shortfall if the house is sold and there’s not enough to cover the mortgage that is packaged into this bond.
After several months of not getting an approval, we went to another mortgage broker we knew, that was a member of Money for the Rest of Us Plus. After a couple months, we had a brand new mortgage that we used to remodel our home in Tucson, because ultimately we had to pay cash for the house, because we couldn’t get a mortgage, and it was a super competitive market you basically had to do cash offers.
The mortgage originator was Finance of America Mortgage Service Corporation. They obviously sold off the loan to Fannie Mae or Freddie Mac, and then they sold the servicing rights to Chase. Even though Fannie Mae and Freddie Mac and other US agencies buy most of the loans, guarantee most of the loans, package them into mortgage-backed securities, there are other companies that actually service the loan. That’s who you make your payment to. We now make our payment to Chase.
A Big Jump in Home Insurance Premiums
Since it had been over a decade, I’ve been used to just paying my property taxes and my insurance, like we do for our cabin here in Idaho, directly to the company. But when you have a mortgage, by and large, they want to handle making sure the taxes and the insurance is paid, so that Fannie Mae and Freddie Mac’s interests are protected. And so that’s one of the other things these mortgage servicers do—they maintain the escrow account; so a part of your mortgage payment goes into this escrow account, and then out of that escrow, the property taxes and the insurance is paid.
As a result, I got a little lazy and didn’t really pay attention when apparently an email was sent by our home insurer, Safeco, that they were increasing our policy rate. That new insurance rate was $2,900 per year beginning of March, it wasn’t until early April I got a notice from Chase that our mortgage payment was being increased $200 a month. And I was flabbergasted.
We have a fixed-rate mortgage at 3%. It turns out our home insurer, Safeco, had increased the policy rate 73% in one year. I did some research. It turns out the year prior they increased the rate 40%, even though in that case they increase the value of the dwelling coverage by 15%.
Two years ago we were paying around $1,200 for home insurance for our house in Tucson. Now they went close to $3,000. We’re not the only one seeing this. There was an article in The New York Times where a realtor there that covers the Jupiter Florida area says 30 of the 100 houses they’ve sold in the last year, the people that sold it was because they couldn’t afford to insure the house anymore. The rates had gotten so high.
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