Introduction
Climate risk poses a serious threat to the housing finance system in the United States, and its effects are being felt in
| CLIMATE RISK TO HOUSING FINANCE |
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communities across the country. Disasters such as hurricanes, floods, and wildfires are causing billions of dollars in damage to housing each year. Homeowners and renters may suffer serious damage to their properties or even lose their homes, their belongings, and their sense of safety. They may also be forced to relocate, which is a costly and disruptive process that harms the fabric of our communities.
Climate risk is already increasing the cost and limiting the availability of insurance in some areas, making it more difficult to develop new housing supply in areas that are most impacted by natural disasters. Many areas that are at risk of natural disasters are also underserved communities, whose habitants are less likely to have access to resources and information about climate risk.
Learning from Stakeholders
The Federal Housing Finance Agency (FHFA) is committed to working collaboratively with industry participants, borrower advocates, international organizations, researchers, and federal, state, and local agencies to make tangible progress toward addressing climate risk. Over the past year, we have participated in discussions with the public and our stakeholders that illuminate the challenges homeowners and renters face. For example, one community organization in Alabama shared that its clients are seeing higher energy costs, which are impacting their ability to meet their monthly rental or mortgage costs. Another way that we are seeing climate risks manifest is through the withdrawal of insurance coverage in certain climate-vulnerable regions. Where insurance coverage remains available, the cost of obtaining that coverage has risen due to the increasing frequency and severity of natural disasters striking those areas and the increased cost of rebuilding. In some cases, homeowners have not rebuilt after wildfires due to insufficient insurance coverage to finance the higher costs of reconstruction.
On March 6, 2023, FHFA hosted a roundtable in Wilmington, North Carolina on climate resilience, preparedness, and response – and risk management considerations – under the Federal Home Loan Bank (FHLBank) System at 100: Focusing on the Future initiative. Participants in the roundtable discussed several critical issues, including the increasing risk of natural disasters, the rising cost of hazard insurance, and the challenges of developing resilient housing in areas at risk. The panelists also discussed ways to mitigate climate risk. These solutions included investing in disaster preparedness and mitigation efforts, providing financial assistance to homeowners and renters affected by natural disasters, developing new technologies to help communities adapt and mitigate impacts, and reducing greenhouse gas emissions.
Protecting Consumers
Through our commitment to securing the safety and soundness of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the regulated entities), we are working to incorporate climate risk considerations into our policy development and review processes. This will better ensure that the benefits of climate risk mitigation and adaptation are shared equitably. We are also encouraging our regulated entities to consider how climate risk can affect consumers, and to incorporate climate risk into their overall risk management structure. We facilitated joint working sessions with Fannie Mae and Freddie Mac (the Enterprises) to explore and understand how climate risk can affect housing finance, housing policy, and community development. FHFA also oversaw the development of new strategies, such as Fannie Mae’s provision of climate data as part of its Equitable Housing Finance Plan and the launch of a flood risk awareness campaign to educate homeowners on flood risks, hazards, and mitigation options. Our goal in taking these actions and others is to help protect underserved borrowers and renters from the impacts of climate risk and foster greater resiliency and sustainability in the housing finance sector.
FHFA Actions
As part of its attention to climate-related issues, FHFA established eight agency-wide internal working groups and a steering committee in 2022 to assess the progress of the regulated entities in managing climate risk. The goals of the working groups and steering committee are to better understand the impact of climate risk on the housing and mortgage markets, including any disparate impacts on disadvantaged communities, facilitate the sharing of climate-related financial risk data and information with other public sector partners, and make recommendations to ensure our regulated entities will continue to achieve their broader missions in the housing finance market in a safe and sound manner.
| # | Working Group | 2022 Key Accomplishments |
|---|---|---|
| 1 | Data and Research Working Group | Worked with FHFA’s regulated entities to identify climate risks and sources of data gaps. Additionally, made progress on four research projects related to climate risk and housing finance: a literature review, a project to measure Enterprise exposure to natural hazard risk, an evaluation of how mortgage performance varies across borrower demographics following a disaster, and a project to evaluate the effect of natural disasters on house prices. |
| 2 | Assessing Exposure to Climate Change Working Group | Worked with FHFA’s regulated entities to develop the capacity to conduct climate scenario analysis and modeling to yield insights into the likely effects of climate risk. Working with domestic and international financial regulators to exchange knowledge and insights related to climate risk modeling. |
| 3 | Reporting and Disclosure Working Group | Worked to enhance the transparency, accountability, and alignment of the Enterprises’ Environmental Social Governance (ESG1) reporting. Also monitored the Securities and Exchange Commission’s (SEC) proposed Climate Disclosure Rule. |
| 4 | Governance Working Group | Established standards for integration of climate risk into overall corporate governance and strategic planning of the Enterprises and FHLBanks. |
| 5 | Consumer Protection Working Group | Established expectations for the Enterprises to consider effects of climate risk on vulnerable communities and consumers. |
| 6 | Green Bonds Working Group | Investigated potential ways to improve the effectiveness of energy efficiency and resiliency features in homes with loans included in Enterprise green bonds. Began working with the Enterprises to explore their “greenium” (the premium that investors are willing to pay for securities backed by loans on properties with energy efficiency or resiliency enhancements) calculations and how that premium could be used to spur green bond investment. |
| 7 | Agency Working Group | Participated in interagency meetings focused on reducing carbon footprints. Built capacity of FHFA staff through training sessions and information sharing. |
| 8 | Legal Working Group | Provided guidance to other Working Groups and the Steering Committee on legal issues. |
FHFA recognizes the value of working collaboratively with other agencies and the broader housing industry to address climate risk. FHFA has engaged with public and private sector stakeholders to identify issues and potential mitigation strategies. FHFA also continues to participate in external climate-focused groups and interagency workstreams. This includes discussions on data requirements and infrastructure, scenario analysis, and risk assessment within the Financial Stability Oversight Council’s (FSOC) Climate-related Financial Risk Committee. In May 2022, FHFA became a member of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). FHFA staff have since participated in NGFS workstreams related to supervision, scenario design, technical documentation, and capacity building. Since July 2022, FHFA has also served as a member agency of the Financial Literacy and Education Commission (FLEC) and remains actively involved within the FLEC Climate Resilience Group. Additionally, in April 2023, FHFA joined the Mitigation Framework Leadership Group led by the Federal Emergency Management Agency (FEMA). Participation within each of these interagency groups will enhance FHFA’s capacity to address climate-related financial risks to the housing finance system.
In November 2022, FHFA held an Economic Summit on Climate Risk. The Summit brought together a range of stakeholders from government, industry, and academia to discuss climate scenario analysis and ways to protect vulnerable communities from the adverse effects of climate risk. Participants discussed the practical issues related to obtaining property-level metrics of climate risk and applying these metrics toward measuring it. Researchers also shared work on the distribution of climate risk in mortgage markets and on the regions that are most exposed to natural disaster risk. Their work also touched upon how that exposure changes following disasters, and how it may impact individual financial health. Given the positive feedback provided by Summit participants, the Agency has since committed to host one Economic Summit devoted to Climate Risk per year.
In the coming months, several of FHFA’s Climate Change and ESG Working Groups plan to provide regular updates on their work to promote transparency and accountability and to inform the public about FHFA’s activities to address climate risk. We also invite the public to contact FHFA’s Climate Change and ESG Leadership at ClimateChange-ESG@fhfa.gov to ask questions and provide input.
Author
Daniel E. Coates, Deputy Director, FHFA Division of Research and Statistics,
Chair, FHFA Climate Change and ESG Steering Committee
1 ESG encompasses considerations of environmental, social, and governance factors. For the Enterprises, ESG covers their work to enhance environmental sustainability within the homes they finance, to advance consumer access to safe, resilient, and affordable housing opportunities in a sustainable manner, and to embed climate considerations within their board and management processes.
Tagged: FHFA Stats Blog; climate change