Canadian mortgage lender rolls back activities in flood-prone zones

The Desjardins Group, a Quebec-based lender, is no longer issuing mortgages in high-risk flood areas, multiple media outlets reported this week. That is stoking concerns that similar measures could be taken in other places, including the U.S. 

According to the Insurance Bureau of Canada, roughly 1.5 million homes, representing about 10% of the nation’s housing market, are already unable to obtain flood insurance as many insurers across Canada avoid flood zones. 

In addition, Canada doesn’t have a national flood insurance program. In the U.S., Congress still has to vote on the extension of the National Flood Insurance Program (NFIP), which is set to expire on March 22. Since September 2017, NFIP has been reauthorized without dedicated legislation 28 times. 

Canadian homes in recently flooded areas posted lower values. The sales prices of these homes dropped by 8% within six months following a natural disaster, according to a 2022  report by researchers at the University of Waterloo. 

If other mortgage providers in Canada were to follow Desjardins’ example, the consequences for individual homeowners and the housing market at large would be sizable. 

The recent move in Canada echoes pullbacks by residential property insurers in the U.S. Over the past 20 months, eight insurance companies in California have either paused or restricted new policies in the state, highlighted by the departures of State Farm and Allstate in early June 2023. 

In February, the Hartford Financial Services Group, better known as The Hartford, stopped issuing new homeowners insurance policies in California. In Florida, the departure of many insurers and reinsurers has resulted in homeowners paying an average of nearly $4,000 a year in insurance, which is nearly three times the U.S. average, according to estimates from the Insurance Information Institute.  

These homeowners insurance woes are also beginning to affect mortgage origination activity. For example, the rising cost of homeowner insurance policies in Florida contributed to an explosion in the cost of owning a condominium, according to a Redfin report. As a result, a wave of homeowners started to offload their properties, devaluating the assets. On the demand side, buyers have become more wary of purchasing a condo since it has become less affordable.