California today: Who owns the risk for earthquakes?
R.J. Lehmann, a researcher at the R Street Institute, a nonprofit organization that promotes free markets, calculates that the two federally supervised mortgage finance institutions known as Fannie Mae and Freddie Mac could lose as much as $50 billion to $100 billion in a big earthquake because they own so many uninsured mortgages in seismically risky areas like California.
“Our message is that this is the largest uninsured catastrophe risk currently in the financial markets,” Mr. Lehmann said in an interview. “Among those who are holding the bag is the U.S. Treasury.”
Residents of Atlanta, Dallas or New York may be thousands of miles from areas at most risk for earthquakes. But they are exposed, Mr. Lehmann argues, because Fannie and Freddie would most likely need a bailout of taxpayer money after a big earthquake.
Mr. Lehmann says that he recognizes the high cost of insurance but that the government should study ways to make it more affordable — and to lower the risk to a national mortgage system still recovering from the financial crisis a decade ago.
“Taxpayers can no longer be asked to bear the risk that hundreds of billions of dollars could come crashing to the ground in the blink of an eye,” Mr. Lehmann said in his study.