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NEW: government keeps pumping mortgage money into communities facing climate change danger as risks catch up with the real estate market.
Policymakers & government-backed lenders are aware of the problem, but feel unempowered to act.
I dive deep here:
https://www.politico.com/news/2020/11/30/climate-change-mortgage-housing-environment-433721
Policymakers & government-backed lenders are aware of the problem, but feel unempowered to act.
I dive deep here:
https://www.politico.com/news/2020/11/30/climate-change-mortgage-housing-environment-433721
This #longread is the result of months of reporting. I spoke with regulators, housing experts, banks, climate analytics firms, asset managers, securities traders, academics and congressional staff about this quietly understood weakness in the US fight against climate change.
A debt of gratitude is owed to the countless people (like @amine_ouazad, @jesse_m_keenan, @susan_wachter, @owenslindsay1 & others) who walked me through their research. I'd never understand the terms "basis points" or "credit-risk transfer markets" without their patience & help.
But here's essentially what's going: Fannie Mae & Freddie Mac exist to provide a steady stream of mortgage financing to put Americans into homes.
We know they're doing this in places where climate risks have grown appreciably. That's creating a ticking time bomb.
We know they're doing this in places where climate risks have grown appreciably. That's creating a ticking time bomb.
The challenge is layered. Fannie & Freddie point out that homes in the floodplain require flood insurance. But they rely on outdated FEMA flood maps. We know people live in flood-prone areas that are not mapped into the floodplain - and therefore don't have insurance.
Fannie & Freddie, of course, know this too. So they have begun to point out that their portfolio has survived past storms, like Hurricane Harvey.
But that is backward-looking & static. It ignores the fact that climate change risk is growing. It's not a dynamic assessment of risk
But that is backward-looking & static. It ignores the fact that climate change risk is growing. It's not a dynamic assessment of risk
So the goal would be to price insurance steeper, right? Well, maybe. But to do that in an actuarially sound way, rates might become so pricey -- because the homes are so obviously in harm's way -- that they become uninsurable, or insurers flee markets.
Fannie & Freddie MUST gobble up whatever home loans private banks sell as securities -- Fannie & Freddie's mission is to be a cash spigot.
That means banks could offload climate duds to taxpayers. As one private banker told me: "that is certainly something I have contemplated"
That means banks could offload climate duds to taxpayers. As one private banker told me: "that is certainly something I have contemplated"
So what about directly pricing climate risk into mortgage lending?
Again, tricky.
Again, tricky.
Some communities would suffer a death spiral overnight if rates reflected actual risk.
Amortizing risk across all mortgages, though, would raise rates/price signal too little. It would not dissuade people from moving to vulnerable places.
Amortizing risk across all mortgages, though, would raise rates/price signal too little. It would not dissuade people from moving to vulnerable places.
On top of that, there's major equity questions. Many Black communities live in low-lying and flood-prone areas as a result of racist redlining policies. Home values in such communities would tank -- even as people remain exposed to climate disasters.
We're left with quite a pickle.
Everyone knows the problem exists. The choices are hard. They know the status quo is unsustainable.
But that doesn't mean change is impossible.
As former FHFA Director Ed DeMarco told me:
“The short answer is they could if they wanted."
Everyone knows the problem exists. The choices are hard. They know the status quo is unsustainable.
But that doesn't mean change is impossible.
As former FHFA Director Ed DeMarco told me:
“The short answer is they could if they wanted."
