The Federal Housing Finance Agency (FHFA) hosted over 300 stakeholders from government, industry, and academia at its third annual Econ Summit on Climate Risk on November 12, 2024. In her opening remarks, Director Sandra L. Thompson emphasized that climate change poses a serious threat to the safety and soundness of the U.S. financial system. Subsequently, three panels highlighted research focused on insurance, securitization, and mortgage performance, and how these housing finance topics intersect with climate risk.[1] The analysis and conclusions presented during the panels are those of the presenters alone and should not be represented or interpreted as conveying an official FHFA position, policy, analysis, opinion, or endorsement.
In the first session, speakers shared analysis and insights on property insurance and climate risk, including rising premiums, the potential for strategic behavior regarding claims, and homeowners’ perceptions of costs due to climate risk. Philip Mulder (University of Wisconsin-Madison) discussed the impact of frequent disasters on increasing insurance premiums. His findings show the rise in premiums since 2020 correlates with local disaster risk and is largely attributable to the pass-through of rising reinsurance costs.[2]
Next, Amanda Ross (University of Alabama) showed an increased likelihood of homeowners filing a wind-related insurance claim following Hurricane Irma in Florida if the home had no inspection on file, suggesting the possibility of strategic behavior influencing the claims process.[3] Ross exploited variation that changed the likelihood of a home having an inspection on file with their insurer, finding that homes less likely to have an inspection were more likely to file a wind-related insurance claim. She noted that this cost may impact the stability of home insurance in areas susceptible to extreme weather events.
Third, Xuesong (Song) You (Freddie Mac) found that insurance non-renewals in wildfire-prone areas of California encourage residents to search for homes with a lower fire hazard. He and his co-authors argue that insurance non-renewals signal an increased risk, impacting housing demand.[4]
In the keynote presentation, Nancy Wallace (University of California, Berkeley) explained how climate, economic, and regulatory factors drive increased wildfire risk in California.[5] She then elaborated on a new methodology that uses spatiotemporal dependence to estimate the likelihood of a wildfire occurrence one year later. This methodology estimates both wildfire probabilities and housing structure losses due to wildfire, and may improve the accuracy of property-level mitigation policies.
In the second session, speakers analyzed disaster risk effects on securitization as well as the potential for securitization to serve as a market tool for risk-sharing. First, Mallick Hossain (Federal Reserve Bank of Philadelphia) investigated how flood risk correlates with loan-level and mortgage-backed securities (MBS) deal-level defaults.[6] Hossain concluded that flood risk is only partially accounted for in MBS deal-level performance.
Next, Amine C.-L. Ouazad (HEC Montréal) looked at how wildfire risk flows through the financial system and how private-label residential MBS with relatively high spatial correlation have an increased likelihood of foreclosure and prepayment, as well as higher interest rates at origination within a year following a wildfire.[7] He finds that an MBS that incorporates climate risk could include measures of wildfire propensity, such as MBS-level dollar weighting and spatial correlation. He noted that an MBS that incorporates climate risk could lead to increased investor yield and risk-sharing for borrowers.
In the third session, researchers analyzed mortgage performance following natural disasters. First, Jesse Gourevitch (Environmental Defense Fund) demonstrated that a hurricane increases delinquencies, with effects persisting for two years. His credit score analysis also found that Appalachia and the Gulf and Atlantic coasts are particularly vulnerable areas. He also discussed how projected delinquencies increase alongside the severity of projected flood events.[8]
Next, Nuno Mota (Fannie Mae) used property-level insurance and claim information to analyze how Hurricane Harvey damages impacted short-term loan performance and home sales. He and his co-authors found that short-term delinquency, forbearance, and loan modifications are all positively associated with flood insurance claims, which they used as a proxy for damages. The authors also found that damaged homes were less likely to sell immediately following Hurricane Harvey, and more likely to sell for a lower price and in poor condition.[9]
FHFA recognizes the risks that climate change poses to the housing financial system. Events such as this Econ Summit on Climate Risk are intended to serve as a forum for insightful discussions and engagement that will further a shared understanding of climate-related financial risks and their impact on the resiliency of the housing finance sector.
[1] FHFA provides documents from this event and for the footnotes below on the FHFA Fall 2024 Econ Summit webpage. Note that some papers are not yet publicly available.
[2] Keys, Benjamin J., Philip Mulder, “Property Insurance and Disaster Risk: New Evidence from Mortgage Escrow Data,” National Bureau of Economic Research, no. 32579, June 2024.
[3] Johnson, Erik, Adam Nowak, Lars Powell, and Amanda Ross, “Strategic Behavior in the Homeowners Insurance Market.”
[4] You, Xuesong, Carolyn Kousky, and Ajita Atreya, “Wildfire Insurance Availability as a Risk Signal: Evidence from Home Loan Applications.”
[5] Issler, Paulo, Richard Stanton, Nancy Wallace, and Yao Zhao, “The Wildfire Risk of California Residential Real Estate: Casualty Insurance, Measurement, and Mitigation Policies.”
[6] Dice, Jacob, Mallick Hossain, and David Rodziewicz, “Flood Risk Exposures and Mortgage-Backed Security Asset Performance and Risk Sharing,” Federal Reserve Bank of Kansas City, Research Working Paper no. 24-05, May 2024.
[7] Kahn, Matthew E., Amine Ouazad and Erkan Yönder, “Adaptation Using Financial Markets: Climate Risk Diversification through Securitization,” National Bureau of Economic Research, no. 32244, March 2024.
[8] Gourevitch, Jesse, Brian Seok, Joakim Weill, Carolyn Kousky, and Jeremy Porter, “Impacts of Increasing Flood Losses on Mortgage Credit Risk in the United States.”
[9] Mota, Nuno, Mark Palim, “Mortgage Performance and Home Sales for Damaged Homes Following Hurricane Harvey,” Fannie Mae, Research Working Paper, May 2024.
By:
Cassidy Pearson
Economist
Division of Research and Statistics
November Wilson
Senior Economist
Division of Research and Statistics
Tagged: Climate Risk; Insurance; Securitization; Mortgage Performance