It’s now been precisely two months since the Eaton and Pacific Palisades fires were fully contained and while many short-term solutions have been underway, the road to recovery is obstructed by uncertainties surrounding insurance viability, construction logistics and financial burden.

Local and national banks have enacted various assistance programs as those who were impacted by the fires assess their personal damage. Banking giants like Bank of America, Citi, J.P. Morgan Chase, U.S. Bank, Wells Fargo and BMO Bank are offering 90-day periods of mortgage payment forbearance. Although the 90-day mark is approaching, most of these institutions have policies in place to renew forbearance periods up to three times.

The two largest locally based banks headquartered in the county – City National Bank and East West Bank – both also offered temporary forbearance and will operate on a case-by-case basis for additional support and/or relief for affected customers.

Banks, asset managers, nonprofits and elected officials have been collaborating on recovery efforts, said Raul Anaya, BofA’s business banking president and Los Angeles market president, who stressed the need for a “public-private partnership” throughout the rebuild.

Brentwood-based Banc of California is not a mortgage lender but one action the bank has taken was developing a fire recovery line of credit as an alternative to home equity lines of credit without fees and payments for 90 days.

While from the outside, it can be easy to overlook the wreckage in Altadena and the Palisades, Jared Wolff, chief executive and president of Banc of Cal, stressed that it will be an incredibly long path toward redeveloping the affected areas.

“I explained to people who weren’t from (here) that you could drive through Los Angeles and not know that anything has happened because it really is the two bookends of the city,” Wolff said. “… Now that the smoke has cleared, unless you’re flying over, you don’t see the devastation that exists, and that’s billions of dollars and countless families and homes that have been destroyed.”

Insurance implications 

The wildfires have already had catastrophic impacts on the insurance landscape and there doesn’t appear to be an end in sight. And these impacts are not localized to the fire burn areas.

“This is not an L.A. issue,” Anaya said. “This is an issue for everybody that lives in California, and so many of us in the business community and in philanthropy are coming together to have a conversation about what is needed in order to have a more vibrant, dynamic insurance market here.” 

A significant part of this will be finding solutions to ensure large, national insurers do not leave the state. Just last month, the FAIR Plan – the state’s last resort insurer, which is backed financially by private providers when short on funds – received approval to charge its member insurance companies $1 billion to stay afloat following the wildfires which will dramatically impact premium costs.

Uncertainties surrounding the ability to secure insurance in the future is causing further delays in how residents will choose to move forward, said Jeff Fishman, founder of JSF Financial, a wealth management firm in Carthay.

“I don’t think anybody can make a decision on what they’re going to do as far as rebuilding, not rebuilding, keeping, selling until we know how much risk they’re going to have to either incur going forward or what the risk could be on their own shoulders should they decide to somehow rebuild and not be able to access appropriate, adequate insurance,” Fishman said.

While Fishman mentioned that some of his deeper pocket clients are considering self-insuring, that’s not an option for most. Aside from the future implications, many residents who lost property are already in a tough spot.

The 1994 Northridge earthquake served as a bit of a wake up call for Californians to take comprehensive insurance coverage more seriously, Fishman noted. Even though this mindset lasted for a while, as that incident became more far removed and insurance premiums continued to climb, especially in the last few years, the trend dissipated, and some people began to opt for less coverage.

Spencer Kallick, operating partner at law firm Allen Matkins’ Century City office, pointed out that someone’s mortgage lender takes precedence following insurance claims.

“If you had $4 million of insurance and a $4 million mortgage, your bank receives the $4 million and you receive nothing,” Kallick said.

While Kallick said many of his clients impacted by the fires have already received 90-95% of their insurance policies, the issue is that many people were underinsured and/or hadn’t reviewed their policies in a long time.

Even for those who did have better coverage, Fishman said “it’s never going to be enough.”

When taking into account estimates of rebuilding costs being about $1,200 per foot, he doesn’t foresee anyone having their entire rebuild covered.

Different types of insurance

Moussa Diop, a professor at USC with expertise in mortgage securitization and real estate, finds that those who are privately insured will have better chances for rebuild coverage as opposed to the FAIR Plan which he called a “cash trap” due to its current financial standing.

Impacts of damaged infrastructure must also be considered when looking at rebuilding through an insurance lens. Matt Keenen, managing partner at Irvine-based real estate development firm SunCal, outlined the complications of insurance when it comes to residential structures versus the land they were built on. 

Referencing research from USC Neighborhood Data for Social Change, Keenen pointed out that two-thirds of home values in both Altadena and Pacific Palisades are derived from the actual land, but people are only insured for the structures on said land. When the value of a lot is tied to the infrastructure it has access to and the infrastructure is no longer intact, rebuilding is further disrupted, Keenen said.

“The infrastructure … is not insured and requires regional, community wide efforts to rebuild and to finance and so, therein lies a big problem,” Keenen said. “How many water lines need to be replaced? How many sewer lines need to be replaced? How much roadway and electrical infrastructure needs to be fixed? Those are all things that are tied into that lot value that are not insured by the insurance company or the homeowner.”

Options for financing include public financing and bond districts – both Mello-Roos community facilities districts, a special tax district created to fund a particular infrastructure project, and enhanced infrastructure financing districts – though Keenen does not envision a smooth process. He estimates rebuilding infrastructure will cost between $75,000 and $150,000 per home, not including fees.

Keenen also has concerns about investors, insurers and developers shying away from doing business in areas that may be deemed fire prone to minimize risk. 

Reconstruction hurdles at play

Construction costs, environmental concerns and permitting timelines will be significant hurdles as the city moves to rebuild, said Gabe Steffler, an associate at Beverly Hills real estate investment bank Max Benjamin Partners.

“With construction costs surging, developers will need to inject more equity into larger commercial and multifamily projects, which will be challenging given the current liquidity shortage,” Steffler said.

Additionally, he anticipates “tighter lending conditions” which will result in limitations on the loan amounts homebuyers will be able to secure.

Kallick also questions how the lending landscape will move forward in the rebuild process and what role banks will play.

“Banks deal in the potential for risks to occur… and I think that a lot of the larger banks are going to think twice about lending, even to multi-million dollar rebuilds,” Kallick said. “I think you’re going to see a lot more of the smaller regional banks play more of a role as well as some hard money lenders.”

The permitting process will also carry weight in the reconstruction timeline.

Despite actions the city has taken to expedite certain processes such as streamlining permitting for building plans with fire-resistant elements, Steffler is not convinced these will be enough to guarantee a speedy rebuild, given the thousands of projects that will be seeking approval, noting that “expedited doesn’t always mean efficient.”

“We’ve already heard frustrations from large homebuilders working in West L.A. and the San Fernando Valley about slow responses from the building department in the Palisades,” Steffler said. “If these challenges persist, they could significantly delay reconstruction efforts.”

All these factors will impact the types of projects that emerge. There could be a shift toward modular homes in favor of ground-up constructions for a faster process, Kallick said.

As far as timing goes, Steffler asserted that the Palisades rebuilding will take longer as it will likely lean toward luxury homes and face additional challenges due to its topography. While Steffer said Gov. Gavin Newsom’s decision to waive Coastal Commission requirements will help in terms of the community being in a costal overlay zone, “the (Palisades’) hillside terrain will (still) make rebuilding more complex, costly, and time-intensive compared to Altadena … (which) will likely see a smoother, faster reconstruction process.”

The national economy’s role

Recent policies from the current administration, such as mass deportations and tariffs, will also create challenges for rebuilding, Kallick said.

“What’s happening at the federal level with tariffs certainly plays a role. It’s an economics 101 issue,” Kallick said, with regard to supply and demand, specifically increased demand for labor and lumber.

With Canada as “the dominant supplier of U.S. lumber imports,” according to the United States International Trade Commission, trade tensions between the neighboring countries could pose a threat to affordability.

Additionally, research from the Immigration Forum reports that 40% of California’s construction workforce are immigrants, and according to the Center for Migration Studies, a little over half of U.S. construction workers are undocumented.

The state of interest rates is also top of mind in people’s ability to rebuild. This month, the 30-year residential mortgage rate has been on average 6.7%. Meanwhile, in March 2015, it was 3.8%.

Having to finance new mortgages at much higher rates than many homeowners likely had previously will create a financial burden on top of those who are still paying off their original mortgage, Fishman noted.

In response to this obstacle, Anaya said BofA is looking into the possibility of offering lower reconstruction lending rates than industry standard for those who are facing challenges, though this is still in early stages.

Additionally, East West Bank’s Executive Vice President and Head of Global Banking Deborah Leerhsen pointed to the bank’s relationship with the Federal Home Loan Bank of San Francisco as a means to offer more competitive rates during times of disaster.

With BofA’s resources, Diop said that it, along with other banks of comparable size, may be able to pull this off in some capacity but he does not see a way for smaller, regional banks or non-bank fintech lenders to do the same. Nevertheless, even if some flexible rates are offered, people are still going to be drowning with costs associated with prior loans, new financing and temporary housing, Diop said.

“Whatever subsidy (people) have received from the government in terms of temporary housing is going to run out very soon too (in addition to forbearance offerings) so they will have to start paying for housing themselves directly, and that will have to take priority over servicing their mortgages,” Diop said.

The impacts of temporary housing will likely impact Altadena and the Pacific Palisades disproportionately. With the Palisades’ community’s socioeconomic status being higher on average, those dislocated from the area won’t struggle as much to occupy higher end housing, which has a much higher vacancy. On the other hand, people affected by the Eaton fire, who are more likely to be seeking affordable housing, will have a difficult time as vacancy in that realm is quite low as it is. Thus, Diop sees the possibility of folks from Altadena temporarily migrating to other areas such as the Inland Empire.

“You really feel for these people, because they will be experiencing this hardship for a while,” Diop said. “It’s going to take some time before their lives are back to normal.”