Sea Level Rise Mortgage Modifications
Constructively Dealing with the Ticking Mortgage Bomb
For current mortgagees and lenders, an alternative to Sea Level Rise (SLR) Relocation Accounts may be the "Sea Level Rise Mortgage Modification."
Consider the example of a property owner who purchased a house in a vulnerable SLR area in the year 2000. At that time he or she never heard of rising seas, and SLR science was just beginning to formulate credible projections for coming decades. The borrower committed himself to a 30 year mortgage.
Fully intending to stay in the property for as long as possible, the borrower ultimately learns his property has a finite term of usefulness as swelling seas pose increasing risk to the health, safety and security of the his family and neighborhood.
On paper, the borrower's financial commitment ends in 2030. In some coastal areas of the nation, as the waters incrementally rise between 2000 and the end of the mortgage term, the property becomes increasingly hard to sell. Forced to stay in his home, the homeowner cannot pay off the mortgage balance early.
The lender and borrower face difficult choices never before encountered in the world of real estate and finance.
When regularly and then permanently flooded, mortgagors will not want to make a choice between paying their mortgage obligations or, alternatively, defaulting and finding a new venue in which to live. Bad credit and a judgment against the homeowner would result from a default on the original mortgage obligation, making it almost impossible for him to qualify for a new loan.
On the other hand, banks and other lenders who hold the mortgages will not want to foreclose on useless flooded properties.
Further, if the properties are not prepared responsibly by these stakeholders, toxins from the property which is not structurally ready for intruding waters will harm the oceans in ways never before imagined by the architect and builder of the house, not to mention the local government.
What to do in this stark financial reality as nature encroaches? We need solutions. One possible option is to modify the loan agreement.
An "SLR Mortgage Modification" could take many forms and could be structured something like this:
A. Two thirds of the principal and interest payments continue to be made as they are now...to the lender. These payments continue until the local government declares and certifies, under strict federal and state criteria, that it is no longer safe to use and reside in the property.
B. The remaining one-third of the payments can be equally divided into three distinct categories.
1. One portion of the monies would be placed into a tax-free SLR Savings Account, to allow the property owners/borrowers to save monies to move elsewhere in the years to come. This is the "mortgagor" component.
2. Another portion of those funds would be paid to the mortgage company at the end of the habitable term of the property. This is the "mortgagee" component.
3. A final portion of the funds would be used to environmentally "shore up" or secure the structure and underlying land so that when flooded, toxins from tanks, utility connections and other environmentally dangerous sections of the property do not further pollute and acidify the intruding ocean. This is the "public interest" component.
C. The mortgage lender would be contractually assured the borrowers would do business with it in the future when new housing is needed and located. By participating, the lender would have a "first option" to finance the borrowers new property if home ownership (as opposed to renting) is chosen again by the displaced homeowners.
D. Federal and State governments would provide tax credits for the lenders to participate in this program. In exchange, the lender would not foreclose on the properties, and the homeowners would not suffer an adverse credit score by not being able to pay the full life of the original loan, should that occur. Stated simply, there would be no foreclosure if certain well-defined criteria, established by law, were met.
Such a formula should be vigorously debated, as the interests of the lender, borrowers, general public and government are served by such a plan, or something substantially similar to it. It takes years to introduce such new tools into the marketplace, but we must start now. The oceans are not waiting.