Jean Eaglesham
Appearances
The Journal.
State Farm Cut Policies. Then the Fires Hit.
So other companies like Allstate, Travelers, were pulling back from there. They were looking at very rapidly rising inflation. They were looking at much higher catastrophe risks. And the insurers just looked at it all around and said, this isn't working for us. That's our colleague Jean Eaglesham. But State Farm, after the pandemic... kept on selling in these high-risk regions.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
And we talked to lots of independent insurance agents, rival agents, and they all said they were incredibly surprised to see that State Farm would agree to insure very high-risk properties.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
Like a good neighbor, State Farm is there.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
And certainly in 2021, 2022, we found State Farm's own internal indications were that they should have been asking for very big rate increases to match the kind of risks that they were adding up. So they should have been asking for 20, 30 percent or more, but they kept asking for 6.9 percent.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
So you have this odd system where State Farm, they're increasing risks, they're putting in very low rate increases, and they're taking on new business that's really effectively they're not charging enough for.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
It's really not clear why they were so slow to turn around and stop writing new business and pull back. I think the company itself would argue that They're owned by policyholders, not by public shareholders. And so they would say, we like to stay in places as long as we can. So they would sort of portray it as a sign of their loyalty, if you like, to the market.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
Independent agents said to us they don't understand at all what State Farm was doing in those years.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
It's a shockingly high level risk. In the context of the California market, for the biggest insurer in that market to say we need 28% just showed how serious things were.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
They really had to act. So in the fall of that year, we saw the regulator essentially say, I'm going to give the insurers pretty much everything on their wish list.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
Their argument was, we just have too much risk on our books. We're still making a loss on every policy we sell. We have to take action now.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
The Fair Plan has been getting into increasingly perilous financial situation. Here's our colleague Jean Eaglesham again. So with this crisis in the state... The net effect of the insurers pulling back is it's forced many, many more homeowners onto the fair plan. And because of the way it operates, it essentially has to take all comers. So it's skewed towards the highest risks.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
So a normal insurance company would try and balance its risks. It wouldn't have too much exposure in very dangerous areas. The fair plan is the opposite. It's got a ton of exposure in the worst areas. It can't really balance its risks.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
So we're now in the process of working out how that's going to be divvied up between the different home insurers. So how much each company will have to pay. They will then in turn say, OK, we want to pass on half of that to our policyholders. And assuming that's agreed, people will then see that amount added to their next home insurance bill.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
So you can see policyholders in areas far, far away from these fires are going to get an additional charge because of this.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
So the whole market is looking very difficult at the moment. And the expectation is, yeah, insurance, home insurance, unfortunately, is going to get even more expensive and even harder to find.
The Journal.
State Farm Cut Policies. Then the Fires Hit.
State Farm in California is saying the fires have put it in a dire financial situation. Now they have billions of dollars in claims coming because despite their non-renewals, they're still the biggest home insurer in the market. They still have thousands of policyholders in those affected areas.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
The issues with a property that can make them blacklisted include structural issues, such as safety concerns, but also financial issues like cash reserves. And increasingly in recent years, a bigger and bigger problem is insurance.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
Fannie Mae and Freddie Mac, who are mortgage finance giants who are central to the market, are increasingly saying that the coverage these developments have isn't good enough for their requirements. Now, that really matters because the main mortgage lenders, they look to sell their loans to Fannie and Freddie.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
If they can't sell them, then the lenders will turn around and say, actually, we can't give you the most common type of loan. That leaves buyers trying to get a different type of loan, which is often more expensive, may require more money up front, or they may just give up on the transaction.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
We're seeing these developments, particularly in areas of high risk, so disaster prone areas where the insurers are pushing up the cost of insurance quite dramatically and also cutting the coverage. And it's those cuts to insurance coverage that are causing a lot of the problems.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
Condo owners in these developments where they're blacklisted are worried about how that's going to impact their value of their properties, what's going to happen when they do come to sale. But what we found is that if they look to get an insurance policy that does meet Fannie's standards, in some cases the rate that's being asked for that is unaffordable.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
So there's a few things changed here. One is after the Surfside collapse in Florida, the tragedy in 2021, there were tougher safety laws put in place in the state, and Fannie, as a result as well, tightened up their enforcement of their existing requirements.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
Another thing that's changed is that Fannie and Freddie are looking to enforce their requirements more strictly, according to real estate folk and lenders that we've spoken to. And the third factor that's coming together is insurers in a very tough climate for property insurance we've seen in the last couple of years are increasing rates but also cutting coverage in some cases.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
My pleasure. Thank you.
WSJ What’s News
How a Secret Mortgage Blacklist Is Making It Hard for Condo Owners to Sell
We're seeing these developments, particularly in areas of high risk, so disaster prone areas where the insurers are pushing up the cost of insurance quite dramatically.