Smith Brain Trust / March 8, 2023

Toxic Train Derailment Vexing for Real Estate Industry

Toxic Train Derailment Vexing for Real Estate Industry

Health safety for residents following the Feb. 3 Norfolk Southern train derailment in East Palestine, Ohio, has been a top concern. Has it really been safe enough to return – both for the short- and long-term?

Underlying this mystery is a separate concern: disruption to the area’s real estate market. 

According to a recent NPR-affiliate report, a number of tenants in East Palestine have moved out since the derailment, “putting landlords in a bind.” And typical real estate practices are “out the window.” For sellers and buyers, for example, the latter can back out of a sale and recoup a deposit when establishing something is wrong with the house and backing out of sale. However, most contracts, according to a local realtor, don’t have language accounting for environmental contamination from the likes of a train derailment.

Norfolk Southern is committed to paying millions in East Palestine and surrounding communities for negative impacts from the derailment and subsequent controlled burn of toxic chemicals. However, “there likely won’t be protections for borrowers who decide to walk away from their mortgage if there’s no direct acknowledgment by a governmental agency that this is a bona fide existing health issue,” Smith’s Clifford Rossi recently told Inside Mortgage Finance. Such has been the case as the EPA has been conducting and reporting on indoor and outdoor air monitoring tests for volatile organic compounds at about 500 homes in East Palestine.

FEMA guidelines state “the President can declare a major disaster (to trigger federal assistance) for any natural event.” Typically, in the event of a natural disaster, such as a flood or a hurricane, Fannie Mae and Freddie Mac issue press releases alerting borrowers and servicers to verify property damage and outlining the process for providing relief to those affected, says Rossi, professor of the practice and executive-in-residence for the University of Maryland’s Robert H. Smith School of Business.

“The protocols have to be rooted in some scientific basis,” Rossi adds.

But much uncertainty persists about the long-term effects of the chemicals released into the environment, and housing prices have experienced significant decline in previous cases of heavily polluted areas.

In East Palestine’s more immediate wait-and-see situation, FEMA guidance isn’t clear in the case of a mechanical or man-made disaster. Actual property damage in this case has been minimal. And FEMA’s “per capita impact” basis for establishing a threshold for determining “severe” damage would appear to disadvantage a small community such as East Palestine

In the meantime, if borrowers feel their water supply, for example, will be unsafe but are financially strapped, Rossi says they might feel they don’t have the financial resources to remediate the contamination or dig a new well. In such cases, some borrowers might work with their servicers on a short sale, while others might stop making mortgage payments on their homes entirely.

Mortgage servicers, for now, should look out for any uptick in mortgage delinquencies in the area, and if there is one, they might need to offer forbearance, Rossi adds. “Servicers could seek guidance from the GSEs, like Fannie Mae and Freddie Mac, or the FHA and VA on how and when to offer forbearance and loan-modification programs to borrowers financially impacted by the disaster.”

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Greg Muraski
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