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U.S. Public Lenders Ignore Risks as Climate-Driven Mortgage Crisis Looms

As U.S. public mortgage lenders Fannie Mae and Freddie Mac continue to turn a mostly blind eye to climate risk, policy experts warn that such ostrich-like behaviour could spark a reprise of the 2008 housing crisis—with low-income and minority communities, as always, in the crosshairs.

A dangerous paralysis pervades the trillion-dollar public mortgage market in the United States, writes Politico, as public lenders dither on accounting for climate risk for fear of sparking a renewed mortgage crisis—and of the political and social fallout from revelations that much of the housing most vulnerable to precipitous devaluation is found in low-income and minority neighbourhoods.

Exhibit A in the conundrum now facing such lenders is Hialeah, Florida, a “gateway to the American middle class for thousands of Cuban immigrants.” That community has found itself increasingly underwater over the past decade as sea levels rise and storm surges becomes more intense.

And many of the homes in Hialeah are located outside the “100-year floodplain,” the benchmark beyond which homeowners are not required to carry flood insurance.

What this means, explains Politico, is that if such homes are damaged enough that they must be abandoned, “the federal government gets stuck with the house.” That’s a “relatively small risk in a time of rising real estate values, when families can use their home equity to take out repair loans, but a potential economic disaster if home prices start to plunge and owners can’t find ways to make repairs on houses that are worth far less than their outstanding debt.”

And home prices are by no means secure, adds Politico, thanks in part to the rise of apps that can place a virtual “warning label” on homes with increased climate risk. Such labels have appeared “on millions of properties from seaside New England, to low-lying areas vulnerable to hurricanes across the Southeast, to the arid, fire-prone hills of California.” If that activity triggers a crash in valuation on the properties—and a dearth of insurers willing to underwrite policies for them—“the more than trillion-dollar Fannie-Freddie portfolio could take an enormous hit, big enough to knock the economy into recession or worse.”

The situation is inevitably going to “crystallize,” said former Freddie Mac executive Ed Golding, who ran the Federal Housing Administration under President Obama and is now executive director of the Massachusetts Institute of Technology Golub Center for Finance and Policy. “And everyone’s going to pull out.”

For now, he told Politico, hard issues are being dodged and a lot of capital is being allowed to flow in to support home purchases in at-risk neighbourhoods.

So if the situation has become so fraught, why all the dodging by public lenders? Politico observes that, after years of working to “promote the American dream of homeownership” and support that dream for underserved communities, “Fannie Mae and Freddie Mac simply aren’t geared to choke off those opportunities to combat a future of more floods, stronger hurricanes, and faster-spreading fires.”

Indeed, bringing climate into the equation would take the lenders “into the political minefield of place-based pricing,” a system the companies’ own charters discourage. Politico explains that “maintaining a largely homogeneous market helps to combat redlining policies that have deprived predominantly Black neighbourhoods of access to credit, while also ensuring that rural communities have the same access to credit as urban areas that have far more lenders.”

Susan Wachter, a real estate and finance professor at the University of Pennsylvania’s Wharton School, added that the increase in borrowing costs needed to discourage home buying in high-risk areas “could also present equity concerns, as many Black communities are situated in low-lying areas as a result of racist historical policies.”

What the United States mortgage market is left with, then, is “a peculiar kind of stasis—a crisis that everyone sees coming but no one feels empowered to prevent, even as banks and investors grow far savvier about assessing climate risk,” Politico writes. While Fannie Mae and Freddie Mac hired a vice-president of climate risk analytics in June, and “previously issued a request for proposals to analyze climate exposure to homes that are outside the 100-year floodplain, and therefore do not require flood insurance coverage,” the lenders “have no designated financial buffer for offsetting climate-related losses to their lending portfolio.”

Among private lenders, however, there is a very different mindset—and set of numbers, Politico adds. Case in point is Morgan Stanley, which now partners with analytics firm Cloud To Street to survey flood risk across America. That kind of data-gathering could leave the public “in the dark about climate risks, while well-heeled financial institutions benefited from detailed knowledge,” Politico notes, citing comment from Cloud to Street founder Bessie Schwarz.

“As climate change happens, as catastrophes are getting more extreme, as the stress gets more extreme, access to this kind of information about your risk…I do think in many ways that’s just a public good,” Schwarz told Politico. “People have a right to understand that stuff.”