Yesterday I had the opportunity to offer comments at the Federal Housing Finance Agency’s public listening session on its recently issued Request for Information (RFI) on climate and natural disaster risk to the housing finance system. This is a watershed moment, with a growing recognition from regulators and market actors that climate change is an economic threat and that climate risks must be acknowledged and addressed.
The FHFA’s role as housing finance regulator
The FHFA was established under the Housing and Economic Recovery Act of 2008, with a mandate to supervise and regulate mortgage entities Freddie Mac and Fannie Mae in the wake of the housing crisis. It also oversees the Federal Home Loan Banks.
With this RFI, the FHFA is acknowledging a new set of risks—related to climate change—that must be better evaluated and factored into its prudential supervision of the housing finance system.
As FHFA Director Mark Calabria noted:
“Natural disasters can adversely affect the regulated entities. Historically, the ability to assess the scale, timing, location, and impact of such risks has been limited. Today’s RFI will help FHFA better understand and address the regulated entities’ exposure to climate and natural disaster risk.”
Bringing UCS research to the FHFA
I began my comments by noting that the day’s deliberations were not just about risks to mortgages, but also about risks to people and their homes. Climate change poses a grave threat to the housing market and the broader economy to which it is connected—all of which could cause disproportionate harms to low- and fixed-income homeowners, communities of color and Indigenous communities.
The FHFA’s mandate to supervise and regulate the housing mission of Fannie Mae and Freddie Mac creates a unique responsibility to ensure that worsening climate risks—including from floods, wildfires, storms, and sea level rise—are carefully and thoroughly integrated into risk assessments for the mortgage portfolio of these entities, with robust actions taken to limit those risks.
The core of my comments drew on research that a UCS team conducted, and which we published in a 2018 report, Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate. We analyzed how high tide flooding, driven by accelerating sea level rise, would lead to chronically disruptive flooding and potential loss of property values in coastal communities over the course of the next few decades. The results were startling.
We found that more than 300,000 of today’s coastal homes, with a collective market value of about $117.5 billion today, are at risk of chronic inundation in 2045—a timeframe that falls within the lifespan of a 30-year mortgage issued today. Approximately 14,000 coastal commercial properties, currently assessed at a value of roughly $18.5 billion, are also at risk during that timeframe. By the end of the century, homes and commercial properties currently worth more than $1 trillion could be at risk.
Risks flying under the radar
By and large, climate risks are still flying under the radar in most housing markets—although that is changing as some communities are experiencing more, and more severe, climate-caused disasters. Expert observers are increasingly noting the potential for abrupt or gradual shifts in values the housing market, which could be triggered by extreme disasters, changes in policies or changes in the market (e.g. in the insurance market) or a combination of those. Unless well-managed, the consequences of such shifts could be devastating for low- and fixed-income homeowners.
There are currently no uniform federal guidelines for disclosure of risks to properties from flooding and wildfires. Current FEMA flood risk maps do not include projections of future conditions, including climate change. These maps also convey a binary view of flood risk—homes are either in or out of the 100-year floodplain—rather than a more realistic, graduated risk profile—which can lead to inaccurate perceptions of risk and underinsurance. Many homebuyers, mortgage lenders, investors, insurers, and others engaged in the housing market are thus making decisions without the information they need to assess risks.
As climate-related disasters worsen, one challenge to Fannie and Freddie is that their geographically diversified portfolio of mortgages may no longer provide the risk management benefits it once did. For example, last year, significant swaths of the country were affected by different types of extreme disasters, sometimes even simultaneously.
Several coastal communities—such as those along the Gulf coast and the coast of North Carolina—are also facing repeated hits, year-on-year, from intensifying storms accompanied by heavy rainfall. Housing markets in these communities, especially those that are smaller and less well resourced, may, over time, lose considerable value. Entire communities stand to lose, as property tax revenues could decline which in turn will affect local public services.
The growing risks to the housing market from climate change threaten to impose a disproportionate impact on low-income communities and communities of color. In some cases, this is because communities are located in places more exposed to climate risks, such as low-lying areas exposed to flooding, and may be less likely to be able to afford flood insurance. They might also be more at risk of having their livelihoods disrupted by climate-related disasters and therefore at risk of defaulting on their mortgages or dropping their flood insurance. Homes owned by low- and fixed-income homeowners are likely to be a much greater share of their total assets, thus any loss in value would be devastating.
Finally, some places face risks that are so extreme that communities may need to consider relocating. Homes in these communities are likely to spiral downwards in value, making it difficult for individual homeowners to recoup their investment, and that could mean potentially passing on losses to mortgage lenders or taxpayers. Beyond the housing market considerations, we need a much more proactive, well-resourced effort—and the governance structures and stakeholder engagement—to address these situations in a just and people-centered way.
Recommendations for FHFA’s Response to Growing Climate Risks
In my comments, I made a few recommendations:
- The federal government must play a lead role in communicating climate risks to the public and incorporating those risks into its own policies and actions. Federal investments are needed to ensure that robust datasets, climate projections and weather prediction services are widely and freely accessible. The private sector is increasingly developing sophisticated proprietary tools to assess climate risks and sharing that information with their clients, however the general public does not yet have a clear appreciation of these risks or the future costs they may face. Over time, those with resources and information will be better able to insulate themselves from housing market risks, reinforcing existing inequities. The FHFA can play an important role in educating the regulated entities, as well as the broader circle of public and private sector actors at the federal, state and local level.
- Mandating climate risk disclosure in the marketplace is vital to help individuals and businesses understand the risks to their investments and drive more resilient outcomes, however this must be done in a transparent and careful way. The FHFA should require more transparent reporting and disclosure of the risks that climate change poses to the mortgage portfolios of the regulated entities today, and how those risks will change over time. Better data and tools for assessing and managing market related climate risks are also needed. The disclosure of risks can trigger sharp—and potentially inequitable—market shifts in highly exposed places, even precipitating a crash in values in some markets. Unlike past housing market crashes, values may not recover in places where the data show the risk is extreme. Thus, it is vital to have other support programs in place ahead of time, communicate and engage with community stakeholders, and to consider ways to phase in some changes.
- The federal government must provide support for risk-mitigation measures, working together with state and local authorities and the private sector. These should include significantly ramped-up and well-resourced programs, ranging from home buyout programs, programs to expand investments in floodproofing of homes, expanded access to affordable insurance and enforcement of insurance purchase requirements in the most at-risk places.
- Limiting new development in flood and fire-prone areas is also key to reducing exposure to these risks over time. The FHFA should work with state and local entities, and community stakeholders, to consider how to limit new mortgages being offered in high-risk areas, while ensuring that communities have access to affordable housing options in safer areas. Our nation’s shameful history of mortgage redlining has led to lasting injustices and inequities in housing and wealth, particularly for African American households. We must think carefully about how not to replicate those harmful patterns—directly or indirectly—by pulling back mortgage financing in some geographies.
- We need bold, transformative and just policies. While realigning market incentives to reflect the latest science is necessary, it is far from sufficient. We need a transformative climate resilience strategy to better protect communities over the long term.
Looking ahead
The line-up of speakers for the listening session was impressive and included academic researchers like Amine Ouazad; credit rating agency Moody’s; catastrophe modelers like AIRWorldwide and CoreLogic; and affordable housing advocates like Marion McFadden from Enterprise Community Partners. The FHFA will be posting the video and slides from this listening session on its website shortly.
The FHFA will also be taking written comments for this RFI through April 19, 2021. My colleagues and I will be filing a more detailed set of comments in reply to the 26 questions posed. If you’re a climate expert, a housing market expert, or live in a community experiencing the impacts of climate change, consider writing in.
These are complex challenges and addressing them will require a thoughtful and sustained effort. The FHFA must focus on steps it can take to limit harm to housing affordability and inequitable losses in wealth, even as it seeks to incorporate the best available science and limit the fiscal exposure of taxpayers to climate risks.