Climate Crisis Hits Home

FHFA is also considering different types of disasters’ impact to borrowers in different locations. Do they default more? Do they move? Do they stay put and rebuild? Do home prices suffer discounts and are these permanent or just temporary? 

The literature review was recently completed.

“Our review finds agreement across the literature that climate risks are at least partially capitalized in housing values and influence lending and consumer behavior,” its conclusion reads, going on to project that disadvantaged groups, including minorities and borrowers of less creditworthiness will bear a disproportionate amount of the climate risk burden.

Watch it on The Interest: Beating The Clock

Policymakers will need to focus on potential impacts to residential real estate and mortgage markets as they navigate the global shift to a low-carbon economy, officials went on to say.

The FHFA is working alongside the Consumer Financial Protection Bureau (CFPB) to develop a flood risk survey to determine when and how borrowers decide to purchase flood insurance.

Over half of all U.S. counties face heightened exposure to flooding, wildfires and extreme heat in addition to other climate hazards, according to the U.S. Treasury report entitled, the Impact of Climate Change on American Household Finances.

The total cost of major U.S. weather and climate disasters between 2018 to 2022 exceeded $617 billion, a record figure, the report indicated. 

For all of these reasons and more, the FHFA’s 2023 Fall Economic Summit focused on climate risks to vulnerable communities. A decision was made to make this a yearly event.

“Of the two sessions we have, one in the spring, one in the fall, the fall one will always be devoted to climate issues,” Coates says. “I think that speaks to the directors’ recognition of climate change as a priority for this agency.”

A HUMAN ISSUE

If global warming and all its impacts keep anyone up at night, it’s Coates. Part of his job is to ensure the agency’s climate change working groups move forward and report to the steering committee on their progress. 

“The shared goal of all the working groups is to ensure that our regulated entities continue to achieve their broader missions in housing finance in a safe and sound manner and that they integrate climate risks into their day-to-day decision-making,” Coates says. “It doesn’t matter whether you’re a government worker like myself, whether you’re a mortgage broker, whether you’re a lender or a servicer, a member of Congress or a member of the press. We all are confronted with these realities. We all have to adapt.”

Several aspects of this global occurrence have entered the partisan dialogue of elected officials, but Coates will be the first to say that climate change is a human issue. 

“We’re not in the political sector. Some of us are lifelong bureaucrats. But we all have a shared interest here, and that is to make sure that we can adapt to the change in the climate.” 

The FHFA does not employ climate experts, gleaning its data from sources such as the National Oceanic and Atmospheric Administration (NOAA).

“None of us at FHFA is a climate scientist,” Coates says. “We are analysts, economists…we have a whole host of specialties, but we’re not climate scientists.”

According to the NOAA, the world’s annual temperature has increased at an average rate of 0.08°C (0.14°F) per decade since 1880 and over twice that rate (0.18°C / 0.32°F) since 1981. Scientists say this global warming has led to a quickly-escalating amount of natural disasters. The 1980s saw an average of 3.3 events occurring annually around the globe which resulted in one billion dollars or more in damages and costs. Since 2018, that average - adjusted for inflation - has exceeded 18 events. 

“We’re dealing with an increasing frequency and severity of natural disasters. And that doesn’t leave a lot of time to worry about the politics of it,” Coates says. “Regardless of whether you call it global warming or climate change, or whether you think the cause is humans or something else, that’s not our area of focus. Our area of focus is making sure that our regulated entities can keep doing what they’re doing and remain safe and sound so that they can continue to achieve their housing finance mission, which makes homes and affordable rental properties available to populations all around the country.”

It’s up to the FHFA to present the facts, projected impacts and recommendations, but the agency was created by Congress and elected officials ultimately dictate policy changes. 

AWARENESS

In the front-facing view of this issue is insurance, as premium increases in some parts of the country have surged by 300 or 400% with more coverage limitations. This is due to the uptick in  claims in recent years, as hurricanes and wildfires have led to widespread damage in Florida, California and other border states. 

“Certain companies have pulled out of various states in terms of offering policies, and that is a direct threat to the affordability of home ownership in those states,” Coates points out. “When you think about sustainable home ownership, that means not only getting people into homes that can afford those homes upon making their first payment and over the life of the loan, but it also encompasses the threats to the affordability of that home.”

When the structural integrity of a house fails, for example, its owner can incur additional costs and may have difficulty making mortgage payments. 

The results of a Consumer Flood Risk Awareness and Insurance Study conducted by Fannie Mae in 2022 indicated that familiarity with FEMA’s National Flood Insurance Program is low. About 67% of respondents said insurance should be mandatory for properties in high-risk areas. 

Increasing awareness and educating the public are priorities of staff as they prepare to address climate impacts with property owners, borrowers and mortgage professionals.  

“We’re trying to take these foundational steps, build awareness and knowledge that will help us determine what steps we need to take in the years ahead. Climate change and the effects of climate change are upon us…I think it’s in all of our self-interest to care about these issues so we can make better decisions about where we live, what type of features the home has, whether it be resiliency or efficiency features. We have to adapt to the environment we’re presented with, and there are plenty of things that we all can do to adapt.”

TAKING ACTION

The FHFA currently does not have a timeline for when changes to the enterprises will be instituted or what those changes will entail. 

“Fannie and Freddie account for about two-thirds of the mortgage market, so when we ask them to make a change, we have to understand that we’re affecting the entirety or a good chunk of the mortgage market,” Coates says. “That can be for good, or if we’re not careful, there can be unintended consequences, not just on your ability to get a mortgage, but even on the value of your home. So we’re studying all of those things that are foundational in setting the scene for making policy decisions related to climate.”

One of the lenders setting itself up to handle atmospheric-related risky business is Planet Home Lending in Meriden, Conn. 

“We’ve had a bunch of initiatives here recently and over time as an organization that we focus on - what we can do to help our customers, help our environment; the overall view of everything we do centers into this, it’s really our overarching perspective of what we’re after,” Planet Home Lending Senior Vice President of Enterprise and Credit Risk Chris Joles says. 

The company offers a variety of home renovation programs to help borrowers reduce their hazard risk and improve access to homeowners’ insurance. In many cases investing in a home’s longevity can reduce premiums and improve coverage, two factors that contribute to a consumer’s overall ability to afford their mortgage. 

“We want our customers to be safe and secure in their homes, and that includes better protection from natural disasters,” says Joles, who encourages anyone who works in the mortgage space to examine the FHFA’s recently published literature review.

“It’s a great starting point for companies to evaluate and understand the issues,” he says. “It really puts all the risks that we face as an industry into perspective.”

Planet is preparing its own loan officers to handle the unique consumer needs expected to arise as climate change impacts become more pervasive. 

“I think that the best thing we can do internally is just to continue to make sure that our loan officers, our operations staff, everyone - are all aware of ways to uniquely use the products that we’ve set up to take care of and help customers with these types of problems,” Joles says. “I don’t think that insurance alone is going to be able to solve this problem completely anymore. That’s where we can fill in for borrowers to help bring this huge investment they have up to wherever they need it to be.”

Servicers and appraisers are also entering this space. Mortgage analytics firm RiskSpan has collaborated with Verisk to create a first-of-its-kind solution for measuring and mitigating the risks of climate change to the housing finance industry.

“What we’re finding is that people want to go through and strengthen their houses to make sure that they’re ready for some of the items that can occur with these climate risks,” Joles says. “There are products out there for energy efficient upgrades and products that allow you to do renovation-related upgrades that are managed closely and tightly. All of our agency partners allow us to go down that path and help our borrowers and customers have some additional oversight and a true partner as they work through those items. Utilizing the funds from a construction-type opportunity allows us to help that borrower make that replacement and lower their risk, to not only have something that’s ready for the weather but also have the actual insurance at a cheaper cost.”

An aging roof, for example, can raise an insurance premium significantly and even be a reason a borrower is denied coverage. 

“Coverage is not only getting more expensive, it often has many more exclusions,” Joles points out. “Because insurance is a state-regulated entity, some of these insurance funds at the state levels are starting to be challenged as well. We want to make sure to engage and get the feedback of a lot of different folks to understand what’s going on. The insurance exclusions, the limitations, that to me is really the biggest implication that I see. I think it’s gonna have a major, major impact that will most likely move this issue into the political sphere.”

The Mortgage Bankers Association, the agencies and the regulators are all watching these proceedings carefully, and the issue is receiving more attention every single day. 

Planet’s programs help fund the modernization of aging homes, but the lender’s outreach extends outside of the mortgage sphere as well. Monetary and volunteer support of environmental organizations continues, and the nonprofit National Forest Foundation and food insecurity organization The Farmlink Project are two beneficiaries. 

“As a company we just happen to intersect with climate change because we consider what we can do to improve the planet, help our customers, and contribute to community efforts,” Joles explains. 

Planet Home Lending released its first-ever Environmental, Social and Governance (ESG) report in 2022, outlining the scope of its efforts.

While consumers aren’t necessarily asking their mortgage team about climate change at this point in time, lenders can expect it to come up in dealings more frequently. 

“We wanted to be accountable and transparent with our customers, the agencies and our business partners,” Joles says. “We’re thrilled to be able to put that out to the industry and be one of the leaders down that path. Making sure that our consumers are protected, making sure that our investors are protected, is our priority.”

LOs and the mortgage companies that employ them are encouraged by government regulators and others to participate in ongoing workshops and panel discussions about the changing climate and housing finance. 

After all, the success of any mortgage professional is contingent on loan volume and performance, which have everything to do with the ability of borrowers to afford homes.