The tragic loss of life, property, and the disruption of lives caused by the ongoing wildfires in the Los Angeles region is devastating. My heart goes out to everyone affected. Beyond the emotional toll, the financial and logistical challenges of managing insurance claims and mortgage obligations can be overwhelming. Beyond the immediate impact, those who have lost their homes will face a prolonged recovery process, and the wildfires will leave a lasting mark on the local housing market. While the fires are still active, this analysis outlines how they may affect housing inventory, insurance, mortgage origination, and construction. Many of these challenges may not be known, till they hit you.
Basic Housing Challenges
As thousands of housing units have been destroyed, local rents are poised to rise. Families who lost their homes will require long-term rentals, while short-term evacuees will also add to demand. Most of the housing locally presently being built are apartments for low to moderate income tenants. That will take some pressure off at some point. But thousands of housing units have just been eliminated.
Be aware that any rental pricing more than 10% higher than market level prior to the fire events is considered price gouging. There are city, county and federal laws in place. LA County Attorney Hochman is pushing civil and financial penalties.
Sales and Property Valuations
There are several dynamics in place. The already limited housing inventory in Los Angeles will face additional strain. Homeowners have been reluctant to sell due to locked-in low interest rates, but some wildfire victims may choose to buy homes, intensifying competition in an already constrained market. Even before this recent wildfire scenario, procuring insurance and the cost has been a major issue in sales transactions closing. There may be a temporary spike in pricing. Once the influx of potential buyers are absorbed, the normal market and affordability elements will take over. Insurance will be even harder to find, adding to affordability issues, there can be downward pricing for some properties.
Navigating Insurance and Mortgage Responsibilities
The first step is to report the fire to your homeowner’s insurance provider. Promptly initiate the claims process and notify your mortgage lender about the loss, as they have a financial interest in the property.
An insurance adjuster will evaluate the damage and determine the payout. Typically, insurance covers the following: Dwelling Coverage: For rebuilding or repairing the structure. Personal Property Coverage: For replacing belongings. Additional Living Expenses (ALE): To cover temporary housing and other related costs. Liability Coverage: If applicable, to address damages to third parties.
Can’t run off with the insurance payout… Because your lender has a stake in the property, they’re named on your homeowner’s insurance policy as a “loss payee.” This means: Insurance checks for dwelling coverage are made payable jointly to you and the lender. The lender ensures the funds are used to rebuild or repair the property, safeguarding their financial investment.
The distribution of funds typically works as follows Dwelling Coverage Funds: The lender holds these in escrow and releases them in stages as rebuilding progresses. Inspections may be conducted to ensure the work is completed to code. Personal Property and ALE Funds: These are usually disbursed directly to you since they’re unrelated to the property’s structure or the mortgage.
Rebuilding your home involves coordination between you, your contractor, and the lender. Here’s what to expect: Submit contractor estimates to your lender for approval. Ensure that all permits and building codes are met during construction. Cover any costs that exceed your insurance payout, as the homeowner is responsible for shortfalls.
If the home is deemed a total loss and you decide not to rebuild, the process changes: The insurance payout may first be used to pay off your remaining mortgage balance. Any remaining funds after paying off the mortgage are disbursed to you.
Understanding the nuances of your insurance policy and mortgage agreement is essential. Keep these factors in mind: Replacement Cost vs. Actual Cash Value (ACV): Your policy may either cover the full replacement cost or the ACV, which deducts depreciation. Underinsurance Risks: If your coverage is insufficient to rebuild, you’ll need to cover the difference out of pocket. Mortgage Default Risks: Misusing insurance funds could lead to foreclosure by your lender.
New Mortgage Challenges
Even when not directly affected by a fire obtaining mortgage to purchase or refinance in wildfire-affected areas will become more difficult for a while. Lenders have a range of guidelines pertaining to funding loans in areas with active State of Emergencies in place. Active fires (eliminates any lenders funding in the effected region.
Some lenders will not fund as long as the State of Emergency is active in the County. Los Angeles County is huge, and the status can last 18 months to 2 years. Even if a property is located many miles from an event, that lender will not be a funding option.
The next level is if a City is in the State of Emergency. Los Angeles City is also huge, and that can eliminate a lot of lender options.
As a minimum lenders will determine if a subject property is located in an affected Zip Code.
The most lenient scenario, after the fires or event is no longer “active” lender will allow for a new appraisal or reinspection of the subject property to confirm the property and neighborhood is still valid as security for the loan.
It takes a knowledgeable mortgage broker to call lender’s underwriters to confirm the lender’s criteria applicable to a specific loan program. Not all lenders or loan programs are created equal.
FHA 203(h) Mortgage for Disaster Victims
As a financing option the FHA 203(h) Mortgage for Disaster Victims is a Federal Housing Administration (FHA) loan program designed to help individuals and families recover from disasters by providing financing to purchase or rebuild homes. Key features include:
Eligibility: Available to individuals whose homes were destroyed or severely damaged in a federally declared disaster area. Owners or renters !
Purpose: Can be used to buy a new home or rebuild the destroyed one.
Down Payment: No down payment is required, making it easier for disaster victims to recover financially.
Credit Flexibility: Offers more lenient credit requirements compared to conventional loans.
Application Period: Borrowers must apply within one year of the disaster declaration.
Insurance: A Growing Crisis
The sheer volume of properties affected by the wildfires means that resolving insurance claims will take several months, adding to the challenges faced by homeowners. Insurance issues have plagued California for years, mirroring similar struggles in states like Florida that also face natural disasters. In California, the problem has been magnified by the increasing frequency and severity of wildfires.
The growing number of catastrophic events has led to massive financial losses for insurers, prompting many major companies to scale back or exit the state. The insurance system, as it stood, was inefficient and outdated. Premium increases often took one to two years to gain approval and relied on historical data that failed to account for modern construction costs and inflation. This mismatch left the system ill-prepared to handle the escalating risks.
Catastrophe Modeling: Insurers are now permitted to use advanced catastrophe modeling, incorporating real-time meteorological and geographical data to assess and price future wildfire risks. This forward-looking approach replaces the outdated reliance on historical loss data, allowing for more accurate risk assessments.
Mandatory Coverage in High-Risk Zones: To gain approval for rate adjustments based on forward-looking models, insurers must commit to offering coverage to a significant percentage of homes in designated high-risk fire zones. This requirement seeks to expand insurance access for homeowners in vulnerable regions.
Reinsurance Cost Inclusion: Recognizing the rising expenses associated with securing reinsurance (insurance that insurers purchase to protect against large claims), the new regulations allow insurers to factor these costs into their rate structures. This provision acknowledges the increased financial strain on insurers due to climate-related risks.
These measures aim to strike a balance between maintaining the financial stability of insurance providers and ensuring accessible, affordable coverage for residents. However, even before these wildfires, premiums were expected to rise significantly. With the additional strain from the new disasters, obtaining new policies is likely to become even more challenging, further complicating the recovery process for affected homeowners.
The California FAIR Plan: A Safety Net for High-Risk Properties
In recent years, California insurers have significantly scaled back their coverage to reduce exposure to wildfire-related risks. According to the California Department of Insurance (CDI), seven out of the state’s 12 top insurers have cut coverage in California over the past four years, with many refusing to renew existing policies or issue new ones. This has left homeowners in wildfire-prone areas with limited options.
To address this gap, the California FAIR Plan (Fair Access to Insurance Requirements) was established as a safety net. It ensures that property owners who cannot secure coverage through the traditional market still have access to basic fire insurance.
The FAIR Plan provides coverage for losses caused by fire, lightning, and other specified perils. However, it does not include coverage for liability, theft, or water damage. Homeowners must purchase additional policies, known as Difference in Conditions (DIC) policies, to cover these risks.
The FAIR Plan is not state-funded. It is supported by all licensed insurance companies operating in California, which are required to participate based on their market share. Essentially, the FAIR Plan functions as a risk pool, with insurers collectively bearing the financial burden of high-risk properties. This shared risk is one reason many insurers have determined that operating in California is too costly.
To adapt to the increasing severity of wildfires and rising rebuilding costs, the FAIR Plan has adjusted its coverage limits over the years:
1990s: Limits were capped at approximately $500,000.
2010: Limits were raised to $1.5 million.
2023: In response to escalating risks and construction costs, the maximum limit increased to $3 million for dwelling and personal property coverage.
Despite these adjustments, many homeowners in high-cost areas remain underinsured. The FAIR Plan’s limits often fall short of the actual costs needed to rebuild homes, particularly in regions like Los Angeles where construction expenses are significantly higher.
As of January 8, 2025, the FAIR Plan carried an estimated $6 billion in exposure in the Pacific Palisades area alone. To mitigate large-scale losses, the FAIR Plan purchases reinsurance. However, the cost of reinsurance has been steadily increasing due to the growing frequency and severity of wildfires.
If wildfire-related losses surpass the combined reserves and reinsurance of the FAIR Plan, it can levy assessments on all insurers operating in California. These insurers, in turn, pass the added costs to consumers through higher premiums, further burdening homeowners.
Rebuilding: A Long Road Ahead
It’s going to take numerous years before the lost housing will be built. It’s going to be a nightmare for the owners of the properties to rebuild. Architects, contractors, materials will all be in short supply. The government indicates they’ll streamline the permitting system. The environmental regulations, permitting, city planning system, gov’t fees are some of the primary reasons there’s a housing shortage.
Environmentalists have used the California Environmental Quality Act (CEQA). CEQA delays or deters the construction of new homes due to its complex requirements and the potential for legal challenges. Maybe because the replacement of existing housing instead of new construction will allow some leniency?
The California Coastal Commission (CCC) adds an additional level of difficulties as it plays a pivotal role in regulating development along California’s coastline, ensuring that any construction aligns with environmental preservation and public access mandates.
Disaster Replacement Exemption: Homeowners can replace structures destroyed by disasters without a new Coastal Development Permit (CDP) if the new structure is substantially similar to the original. This exemption aims to expedite reconstruction while maintaining compliance with coastal regulations.
Emergency Permits: For immediate needs, the CCC can issue emergency permits to address health and safety concerns, allowing for temporary structures or repairs. These permits are typically processed swiftly to aid in rapid recovery efforts.
Permit Delays: Navigating the permitting process can be time-consuming, especially if the proposed rebuild deviates from the original structure or if there are environmental concerns. For instance, a Malibu homeowner waited 12 years for approval to rebuild after a home was destroyed in a 1993 fire, highlighting potential delays in the process
Environmental Regulations: The CCC enforces strict environmental standards to protect coastal ecosystems. Rebuilding efforts must consider factors like erosion control, habitat preservation, and public access, which can complicate and prolong the approval process.
It won’t be a surprise if several properties cannot be rebuilt as the California Ocean Protection Council estimates that sea levels could rise by up to 7 feet by 2100. Homeowners may be required to conduct Sea Level Rise Vulnerability Assessments to evaluate long-term risks. Following previous wildfires and erosion events, rebuilding in these areas has been subject to stricter setback requirements and environmental assessments.
Tax Revenue and Property Tax Adjustments
The Los Angeles City, County and the state all have budgetary issues. There will be a substantial loss of tax revenue. Property owners are entitled to a temporary reduction in their property’s assessed value when it has been significantly damaged or destroyed. To receive the reduction, the property owner must file a claim with the county assessor’s office.
If a structure is rebuilt “in a like or similar manner”, the property owner can retain the original tax basis for the property. The rebuilt structure must be similar in size, function, and use to the original structure. The property owner must complete the rebuilding process within a specific time frame, usually within 3 years of the damage, depending on the county. That can be an issue given the all the rebuilding challenges. If the rebuilt structure is significantly larger, upgraded, or used for a different purpose than the original, the additional value of the improvements will be assessed at the current market rate.
Proposition 19 Expanded the ability of disaster victims to transfer their tax basis to any county in California, provided the replacement property is purchased or built within 2 years of the disaster.
FEMA & SBA Loans
After a wildfire, FEMA (Federal Emergency Management Agency) and SBA (Small Business Administration) loans can provide crucial support to help individuals, families, and businesses recover from the disaster. FEMA offers grants and direct aid, which may not need to be repaid. The SBA provides low-interest loans to help individuals, businesses, and nonprofits rebuild and recover. These loans are more comprehensive and are designed to address losses not fully covered by insurance or FEMA grants. FEMA grants cover immediate, critical needs and minor repairs, while SBA loans address larger-scale recovery efforts, such as rebuilding homes or restarting businesses.
Moving Away
Some affected residents may decide to relocate permanently, driven by the loss of their homes, businesses, or jobs. For many, the wildfires may serve as a catalyst for seeking stability elsewhere, potentially exacerbating population shifts already underway in California.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – Southland Regional Association of Realtors (2025)
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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