This week the affected home and business owners in LA began to scale the mountain of paperwork that inevitably follows in the wake of the fires.
First stop was most likely to file an insurance claim. However, afflicted as it is by fires and earthquakes, California is turning into an insurance desert. Last year, State Farm said it would not renew policies for more than 30,000 homeowners, including 69% of those in the Pacific Palisades neighborhood.
The FAIR plan—California’s state plan of last resort—now has more than 450,000 residential policies, which is up a whopping 40% from last year. That plan caps the damage cost at $3MN; the average home value in Altadena was $1.3MN and in Pacific Palisades, $3.4MN (source: WSJ, 01/11/2025).
Almost 13,000 structures have been damaged or destroyed in the Eaton and Palisades fires, and 12,000 more are threatened.
The math is staggering.
As insurance companies withdraw from high-risk areas, such as Florida and California, policies are getting very much more expensive for the remaining home and business owners. Most mortgage lenders require insurance, but an increasing number of people, who either fully own or rent their home, choose to forgo the insurance.
That is, of course, not great when disaster strikes.
And speaking of mortgages, yes, unfortunately, you still have to pay off your mortgage, even if your home is now a grim pile of toxic ashes.
If your mortgage is backed by Freddie Mac, Fannie Mae, the Federal Housing Administration, or the Department of Veteran Affairs, you can ask for forbearance, that is for the payments to be put on hold for a bit. Even some of the providers of jumbo loans, which are not federally backed, offer this option.
And if the loan is from before or during the early pandemic when interest rates were low it might be worth holding onto because currently, the US mortgage rate is between 6.1 and 8.1%.
That is also better for the bank. While the largest banks in the US ended 2024 on a very high note, regional and community banks are (obviously) much more sensitive to what goes on in the region and community. As of September 30th, 2024, there were eight banks based in or around Los Angeles with more than $10BN in assets (see below).
It doesn’t take a lot to imagine what just happened to their residential and commercial real estate portfolios and will continue to happen in the years to come. Probability of default will most likely go up and so will loss given default. Even more, the value of collateral for the loans just got severely diminished.
Having to realize a loss of that proportion all at once can bring down almost any bank. Whatever can be done to extend-and-pretend (a tactic often seen in CRE when values go significantly down, where lenders give borrowers more time to pay rather than refinance) is better for all parties.
And all signs point to that communities need local and regional banks to recover and flourish.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.