Lenders can benefit from a suite of environmental risk data to better manage their risk exposure on digital mortgages.
A perfect storm for change
There is little argument that climate change is increasing the frequency of severe weather events.
In July, residents in the Hawkesbury region on Sydney’s outskirts had to deal with their fourth flood in 18 months. It followed February’s catastrophic inundation in Lismore in northern New South Wales, which was the city’s second big flood in just five years. And all that came just two years after the Black Summer bushfires of 2019-20 blazed along Australia’s east coast.
Fire and flood are not the only environmental risks to property. Earlier this year, CoreLogic released its Coastal Risk Scores for Financial Risk Assessment whitepaper that found coastal erosion and increasing storm surges alone could potentially affect $25 billion worth of residential coastal properties.
As climate change poses ever greater challenges, lenders must understand how environmental risks could affect the properties and projects they fund. It’s vital that mortgage originators evolve a strategy to minimise their risk exposure, especially as customers expect ever faster turnarounds on loan approvals.
There is a wealth of data available – indeed so much data that can quickly become quite overwhelming and confusing. So what does a lender actually need to know? This is where curated data can provide powerful benefits for lenders navigating digital mortgages.
Environmental risk and digital mortgages
The digitisation of mortgage services has accelerated in the past few years. Consumers increasingly expect a digital end-to-end loan process, from an online mortgage application all the way through to settlement.
The technological push also includes greater adoption of digital valuations, which can be based on the Automated Valuation Model (AVM) or completed by a person who never actually goes onsite.
But there's an issue. Digital valuations, by their nature, may not be able to fully take into account exposure to some existing hazards or recent natural disaster events, let alone future climate-related risks.
Lenders may take on unwanted risks simply because they don’t know what’s happening on the ground.
It all comes back to having the right data early in the loan origination process and having it in a form that is easy for lenders to use and understand.
CoreLogic’s environmental planning overlays, for example, cover flood, bushfire, coastal hazard and landslip risk. These datasets pull together and standardise information from local councils across Australia. They can also be quickly and cost-effectively integrated into a lender’s existing digital process.
The overlay provides a hazard view – in a Yes/No format – that is simple to comprehend and adopt within automated business rules. If a potential environmental risk is indicated for a property, the lender could decide to reject that mortgage application or require an onsite property inspection by a qualified valuer before it is approved.
When it’s incorporated early in the digital mortgage process, environmental risk data can lead to more informed decisions, less paperwork and reduced risk for both lenders and customers. Even when a loan is not approved, this is also discovered sooner, enabling the lender to better manage the applicant’s expectations.
There’s no doubt that the digital mortgage process is faster and brings benefits both for lenders and loan applicants, but lenders must use it in a way that doesn’t cause them to take on unwanted risk.
Looking to the future
With the effects of climate change continuing, there may be a need for lenders to incorporate a more strategic outlook and potentially consider other data points to comply with industry regulation expected to hit the market in the near future.
It’s difficult to know exactly what will be needed, as regulation in this area is still evolving. Lenders, however, should be confident that CoreLogic data products will have the flexibility to adapt and deliver current and future data as required.
CoreLogic already has a natural disaster emergency response solution that assists in the real-time management of disasters and helps in setting appropriate underwriting processes during and after an event.
An even more robust Natural Hazards and Climate Risk solution, offered in partnership with reinsurance specialist Munich Re, can model climate change scenarios across multiple projection years as well as risks associated with existing natural perils. In addition, it can provide a financial loss estimate, which estimates in financial terms the expected damage to a dwelling arising from a given natural disaster.
CoreLogic curates data from more than 7,000 government and corporate sources. Datasets like Environmental Risk, can be combined to offer lenders a comprehensive picture of a specific property’s entire history.
For lenders, such comprehensive property data – including climate or environmental risk data – can be an effective way to mitigate risks. By leveraging such data into their digital processes and business rules, lenders can ultimately streamline the mortgage process, reducing approval times for customers while retaining the checks and balances lenders need.