Why the Florida Real Estate Market Might Face a Total Collapse

Feb 15


Michael Letcher

Michael Letcher

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In early 2009, a story ran in media outlets that very few of Florida's 6 million homeowners paid any attention to. Buried in that story is a frightening scenario that could become a real possibility later this spring. Here's the shocking truth about how you could default on your Florida mortgage without ever missing a single payment.


Most of us,Why the Florida Real Estate Market Might Face a Total Collapse Articles don't want to talk about Florida homeowners insurance.  Even though the Florida home insurance market is still in a state of chaos, we would rather just pay our bill for this year and not think about it again until next year.

So it's no wonder that when a story ran in the Florida media earlier this year about two key financial rating agencies (A.M. Best and Demotech) threatening to downgrade the ratings of dozens of Florida homeowners insurance companies unless something was done about the Florida Hurricane Catastrophe Fund shortfall, no one paid any attention.

If these rating agencies follow through on their threat to downgrade Florida home insurance company ratings, the impact would be disastrous for all homeowners in the state.

Let's take a look at how this potentially dangerous situation was created.

The Florida Hurricane Catastrophe Fund (Cat Fund) charges all Florida home insurance companies a premium for reinsurance - which is insurance for insurance companies.  It is merely a way to permit insurance companies to be paid back by the Cat Fund, once Florida hurricane claim losses exceed certain levels.

To address rapidly rising Florida homeowners insurance costs, the Florida Legislature passed laws in 2007 that increased the obligations of the Cat Fund by an additional $12 billion over previous levels.  That move made the Cat Fund directly responsible for up to $28 billion in losses and led to some modest reductions in Florida home insurance rates.

The change in the Cat Fund seemed like the right thing to do at the time, but there were problems with this approach.  The Cat Fund relies on the full faith and credit of the State of Florida to be able to issue bonds at reasonable interest rates to cover the cost of major storms.  That ability to borrow is what allows the Cat Fund to charge less for the reinsurance than insurance companies would have to pay in the private market for this coverage - and in theory at least would lead to lower insurance rates.

In perfectly functioning bond markets, this approach might have worked successfully for many years.  However, our current financial crisis has changed all of that.  Even the most credit worthy governments across the country cannot borrow all that they need from the bond markets.  The Florida Cat Fund is no exception.

As the Cat fund assesses the $28 billion in exposure that it has, it has publicly stated that given the current bond markets, it has an estimated shortfall of $18 billion.

That shortfall means that it is very possible that after your Florida home insurance company satisfies its primary claim obligations after a hurricane, it can't rely on the Florida Cat Fund to reimburse it for losses above those levels.  In plain English, that means that some Florida homeowners won't have their hurricanes paid in a timely fashion.

So why are the financial rating agencies concerned about this shortfall?

When the rating agencies issue their ratings on Florida home insurance companies they know that both you and your bank rely on those ratings to help predict the financial ability of your insurance company to pay your claim promptly and satisfactorily.  These rating agencies factor into their ratings the quality of the reinsurance contracts among other things - regardless of whether the reinsurance contracts are bought in the private market or from governmental agencies like the Florida Cat Fund.

When the rating organizations assess the $18 billion shortfall in the Florida Cat Fund, they question the reliability of the reinsurance being provided and they know that there is an increased chance that the insurance company won't be able to meet its obligations.  That is why they have threatened to downgrade the ratings of all the Florida home insurance companies that rely on the Cat Fund.

So what will happen to you if the ratings downgrade happens?

You will face nothing short of a major disaster - even if you pay for mortgage on time each and every month.

Here is how this shocking scenario would play out if nothing is done to address this.

The Florida Legislature does not address the Florida Hurricane Catastrophe Fund shortfall in its current session.

AM Best and Demotech lower the ratings of all Florida homeowners insurance companies.

When your mortgage company or bank finds out about these rating downgrades, it will let you know right away that you need to find a new more highly rated insurance company or else you will be found to be in default under the provisions of your mortgage.

Because all the Florida home insurance companies are required to buy certain layers of reinsurance from the Cat Fund, you won't be able to find even one company that will satisfy your Florida mortgage lender.

Your Florida mortgage company will take action to protect the lien that it has on your home by putting forced placement insurance coverage on your home at about 4 times the amount that you had been previously paying for your Florida homeowners insurance - so if the homeowners insurance that you had been buying from your company that had its ratings downgraded was $4,000, the bank will step in and buy a forced placement policy from a company of its choosing that is now going to cost you $16,000 per year!

And here's the worst part.

You'll pay four times more than the cost of your traditional Florida home insurance and you won't recover any money for your home or personal effects if you have a major Florida hurricane claim.  Forced placement coverage only covers the unpaid balance of your mortgage and it will be paid directly to the bank, not you!

You will be financially on the hook for paying your bank the cost of that $16,000 a year policy every month until you are able to find a replacement Florida homeowners insurance company that has a rating that is acceptable to your mortgage company.

During this period of turmoil all Florida real estate transactions will come to a complete stop - which will further worsen the housing crisis in Florida.

This downgrade in the insurance company ratings is expected to happen by May 15, 2009 if the Florida Legislature does not adequately address the shortage in the Florida Cat Fund - with only two weeks to go before the start of the 2009 Florida Hurricane Season.

Unless you feel like $16,000 a year is a small price to pay to protect only your lenders interest in your property, now would be a good time to contact your Florida Legislator to ask them to clean up the mess that they created in 2007!

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