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Friday, 28 February 2020

Stranded mortgage assets

During a phone call this week, I mentioned that one of my 2019 relocation criteria had been the elevation of my current location. Subsequently, I wondered if banks are already considering amending their Expected Loss calculations for (mortgages on) commercial and residential properties, following climate change. The situation is somewhat comparable to "stranded assets" in industries related to fossil fuels (eg, automotive, oil & gas).

I believe in climate change but not in climate urgency. Weirdly, this makes me a climate skeptic in the eyes of climate activists, who promote Project Climate Fear. In my view, there is adequate time (about 100+ years) for adapting ourselves to rising sea levels of about 3+ to 6+ meters (eg, Atlantic-2019, Phys-2018Phys-2020, Washington Times-2018, and my blogs of 2018, 2018, 2018, 2019, 2019, 2020). Moreover, most global sea level rise has already happened (my 2016 blog).

Possibly, this same lack of climate urgency explains why banks are lowering - rather than raising - their interest levels on mortgages for commercial and residential properties. The Probability of Default risk relating to these mortgages should normally follow location risk (eg, ocean or seaside), similar to car insurances (eg, geographical theft risk).

Alternatively, banks are ignoring the risk of "stranded mortgage assets". A Google search on "stranded mortgage assets" - in relation to expected global sea level rise - revealed no relevant articles. I did, however, notice this comment in a 2018 book entitled Stranded Assets and the Environment: Risk, Resilience and Opportunity:
"8. Although most mortgage providers generally require buildings insurance as a condition for granting a mortgage, they do not necessarily require cover for specific hazards, such as floods, to be in place." Note: italic markings in quote by LO.

Hence, it seems likely that mortgage providers deem flood risk as a part of property insurance. I doubt such a view would contain their Expected Loss, which is calculated by PD x EaD x LGD. If property insurance providers would not reimburse flood risk and/or global sea level rise then the Expected Loss calculation must take into account the probability of client bankruptcies.

Possibly, banks do realise the above but are awaiting for their competitors to move first in order not to lose market share. The end result is the same: a massive increase in mortgage interest levels, and a massive drop in real estate values. Also see a similar topic in my 2020 blog: For the last 700 years: interest down, debt up.

Who will blink first?

Stranded (1997) by Lutricia McNeal


Note: all markings (bolditalicunderlining) by LO unless stated otherwise.

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