Property valuation in flood-ravaged areas to be permanently lowered: Fitch

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While the full extent of the damage is yet to be quantified, Fitch Ratings said the flood currently affecting South East Queensland is expected to have a negative impact on mortgage borrowers.
The ratings agency noted that the property damage may temporarily or permanently affect borrowers' ability to pay, and may result in lower than normal recovery rates for damaged properties, mortgage borrowers in the South East corner of Queensland may experience an affordability shock due to an increase in expenses and loss of income; and transactions might bear a certain degree of income shortfall and an increase in losses as lender's mortgage insurance does not cover flood risk.
"Borrowers who have been directly or indirectly affected by the flooding will likely experience some financial distress in terms of property damage, increased living expenses, and potential loss of income," said James Zanesi, Associate Director in Fitch's Structured Finance team. "Queensland's floods might also temporarily reduce available income in selected mortgage-backed transactions depending on their exposure to the affected areas."
In the event of a borrower defaulting due to property damage,  Zanesi said that recoveries might be revised downwards from Fitch's assumptions at the time of initial analysis.
“Not all properties have specific flood insurance in place, and lender's mortgage insurance does not cover for flood damage. Moreover, the market value for properties located in the flooded areas might now be permanently adjusted downwards due to future flooding risk,” he said.
An estimated 35,000 to 40,000 properties are believed to be affected by the flood. Fitch said flood-related losses may take at least six months before being realised.

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