The Credit Crunch is Here
Older homeowners are getting squeezed by loan rejections and skyrocketing homeowner’s insurance premiums
We’ve warned repeatedly of the coming credit crunch, and now consumers are beginning to feel its impact. Just as mariners would ‘batten down the hatches’ when the ship was about to enter rough seas, lending institutions are aggressively moving to reduce their risk exposure to bad loans amid concerns of a looming economic recession. In the wake of one of the Federal Reserve’s most aggressive rate hike cycles large banks such as JP Morgan Chase, Wells Fargo, and Citigroup are setting aside more money to absorb an expected influx of bad consumer debt. It then comes as no surprise that the Federal Reserve’s Survey of Consumer Expectations survey found the overall rejection rate for credit applications jumped to 21.8% in June, up substantially from 17.3% in February.
Considering these circumstances older homeowners seeking to refinance their existing mortgage or purchase a new home could find their loan application denied. In fact, the Fed’s survey found a 29.6% probability that home mortgage refinance applications would be rejected and a staggering 46.1% probability of traditional mortgage applications facing the same fate.
Do retirees need access to more cash than ever before? There’s a strong case to be made for answering yes for two reasons. First, while somewhat moderated, inflation remains a persistent burden for Americans living on a fixed income. Much of that pain can be found in the Core Consumer Price Index or CPI which measures the change in the price of goods and services while excluding more volatile prices for food and energy. The Core CPI has been especially sticky while general or headline inflation has dropped more significantly since last June.
The property insurance disaster
Another reason many retirees have an increased need for access to cash is the implosion of affordable and accessible homeowners insurance.
Florida has not only seen a record number of new residents arrive but natural disasters. Consequently, AAA, Farmers Insurance, and several lesser-known insurers have joined the growing list of companies that will no longer sell or renew policies in the Sunshine State. In an emailed statement to CBS AAA said, “Unfortunately, Florida’s insurance market has become challenging in recent years. Last year’s catastrophic hurricane season contributed to an unprecedented rise in reinsurance rates, making it more costly for insurance companies to operate.” Over 100,000 Floridians will be impacted by Farmer’s Insurance exit alone. However, Florida is not alone with Allstate and State Farm announcing they will no longer accept applications for property and casualty insurance in California citing increased wildfire risks and high construction costs.
Even those seniors who may qualify for a mortgage could find their payments especially onerous not only because of higher interest rates but the massive increases in homeowners insurance premiums that are typically built into a mortgage escrow payment. Even worse, homeowners who cannot obtain or afford insurance could find themselves in default on their mortgage loan agreement and face foreclosure.
Older homeowners in Florida and California may find themselves hammered by both a lack of access to credit and surging home insurance premiums. Perhaps a reverse mortgage could be a lifeline to provide the means of continuing to age in place in these most unsettled times.
by Shannon Hicks July 24, 2023