The Fires: Consequences for CUs, Members and the Economy

Image of couple in front of burned, destroyed home

The endless string of California fires over the past few years offers a post-disaster economic learning moment for the credit union industry across both California and Nevada, according to Redwood CU Board Member and Sonoma State University Economist Robert Eyler.

There are three issues credit union leaders working in any natural disaster-prone area should be aware of: 1) how many residents and credit union members will choose to rebuild their “local” lives versus migrate elsewhere; 2) how many businesses and local workers adjust—or not—to their post-disaster environment; and 3) what types of insurance and federal monies, and how much, will flow into local economies.

“We don’t have enough labor market and residential data from areas burned by the Camp Fire and other fires this past fall to help answer these questions just yet,” Eyler said. “Credit unions across the state are assisting where they can. But those with a footprint in burned communities may still struggle with who is affected, how they can help, and what they need to do going forward.”

The Aftermath: 'Regional' Versus 'Local' Economies
Eyler works and speaks in geographies scorched by the 2017 Northern California wildfires—the counties of Napa, Lake, Sonoma, Mendocino, Butte, and Solano. Regions such as Napa have support from a much more “regional economy” and almost immediately started efforts to rebuild after late 2017. Places like Paradise (in Butte County) where nearly the entire town went up in flames—and the economy is much more “local” with a higher proportion of retired patrons and possibly older workers—won’t have the same opportunity.

For members fortunate enough to rebuild, “Credit unions serving these ravaged communities may have to manage inbound deposits from members’ insurance money,” Eyler said. “It’s money that’s coming in and will eventually go right back out the door. Managing this deposit surge on your balance sheet could be challenging in the short-term.”

Some members may keep their relationship with a credit union but move elsewhere in the county, or even the broader region or the state. It’s possible many former Paradise residents and others in Butte County will choose the City of Chico or somewhere nearby to rebuild their lives. Whether they were a homeowner or renter could help decide.

Shops, small businesses and companies will have to consider their next moves from both a marketplace and worker-retention strategy. More than 2,000 business structures in the Camp Fire, along with their goods and equipment, were wiped out.

“Some may not be able to recover because there is no ‘local’ market anymore,” Eyler said. “You may have business-continuity insurance, but it doesn’t mean a thing without locals who aren’t around to buy, sell and re-create the activity everyone was used to. Also, certain businesses may have more trouble with getting their workers back than anything else.”

Any credit union that wants to stay engaged with an affected business establishment or member should be aware of where these entities and individuals choose to establish their “new” lives, means of livelihood, and the number and type of financial institutions in those new environments.

Credit unions should also envision how local labor markets may expand, contract or change depending on the local fallout. The demographic of local workers and customers may transition depending on who was hit most by the fires and what stage of life they’re in—younger people, middle-age, or the elderly.

Future Mortgage 'Defects' Possible
The "mortgage defect rate" results in a loan being uninsurable or ineligible for sale due to a disaster. In the case of the recent California wildfires, this measurement is poised to jump in the coming months according to a blog post authored this week by Mark Fleming, chief economist for First American, a title insurance and real estate firm headquartered in Santa Ana, CA. The state's "mortgage fraud risk rate" is also bound to rise.

Historical data indicates that natural disasters and "loan application defect risk" go hand-in-hand, he stated. "As we’ve seen too often, natural disasters create the potential and opportunity for significant misrepresentation of collateral condition." (You can scroll to the bottom of his blog to view a historical graph)

The Camp Fire wildfire in Butte County, which has been named the deadliest U.S. wildfire in a century, and the Woolsey Fire in Los Angeles and Ventura counties are some of the worst wildfires in the state’s history, Fleming noted. According to the California Department of Forestry and Fire Protection, the Camp Fire wiped out nearly 14,000 residences (along with 4,500 other structures and commercial buildings) while the Woolsey Fire destroyed 1,500 residences.

"While it’s too early to estimate the cost of the damage from these fires, the Associated Press recently reported that wildfires in Northern California last year 'gutted 6,800 homes and resulted in $12.6 billion in insured losses.' Since the damage from the recent wildfires greatly exceeded the 2017 wildfire damages, we can expect a higher estimate in losses."

Post-Disaster 'Demographic Shift'
Putting aside potential losses from damage, "demographic shift" is another trend to prepare for. A current example during post-disaster upheaval is Ventura County. The local construction sector has recently been touted as a small bright spot due to rebuilding from the Thomas Fire in December 2017, which took out more than 1,000 homes. The county’s construction sector added 1,500 jobs over the past 12 months.

According to a recent economic forecast by California Lutheran University’s Center for Economic Research and Forecasting, rebuilding in Ventura County will last well beyond 2019 as a significant percentage of affected residents have walked away from their properties and are selling rather than rebuilding. A whole new generation of owners is expected to do much of the rebuilding during this long transition.

“Sometimes victims don’t want to live there anymore for whatever reasons, and their insurance money gave them a good reason to take the money and run,” Eyler said. “So you sell out, and a new group of people rebuilds.”

In the case of Paradise, the region may not experience this. It may take “a leap of faith” to rebuild in that area, he said. “It could mean depressed home prices and a little wackiness since a bunch of residential lots will all be for sale at once, along with much less activity in the central business district of the community.”

Forthcoming data will help “sort all this out,” Eyler added. “It’s going to take 6 – 9 months until we see how the fourth quarter of 2018 shakes out for these communities most recently impacted. It will probably be May or June of 2019 to really feel the true nature of how they are doing.”

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