Global warming has caused irreversible damage to Earth’s ecosystems and communities, according to a critical report just published by the UN Intergovernmental Panel on Climate Change.
The damage extended beyond the US housing market, which just saw unprecedented snow and flooding in California, as well as an unusual winter tornado in the South. All that comes after one of the worst storms on record in Florida last year.
The changes have significant implications for the nation’s nearly $12 trillion mortgage market.
Hurricane-force winds are getting stronger, storms are becoming more common, wildfires are spreading faster — and millions of U.S. homes are in the way of everything. But the current housing market is not pricing climate risk into home values. U.S. homes alone at risk of flooding today could be valued at more than $200 billion, according to research recently published in the journal Nature Climate Change.
Fannie Mae, which backs more than 40% of all home mortgages, could bear that risk. The mortgage giant’s chief climate officer, Tim Judge, said current mortgage underwriting does not pose climate risks. So they made a major effort — indeed a defensive one — to figure out the exact climate risks to Fannie Mae’s balance sheet, so they could incorporate that risk into their mortgage underwriting.
“I think there’s still more we need to do, and I just don’t have the analytics to do it yet,” Hakim said.
To help, Judge hired climate risk modeling firms, such as First Street Foundation and Jupiter Intelligence, among others, to figure out how climate risk factors into home values and mortgage underwriting.
First Street, for example, looks at the climate risk of floods, fire and wind, and brings it down to the individual property level. Jupiter studies the environment and community.
But the work can’t come fast enough. A new study from CoreLogic shows that on the current climate trajectory, the estimated number of US homes affected by climate-related disasters will increase from less than one million in 2030 to more than 62 million in 2050. less than $ 200. million to close to $ 9 billion in a given year.
Consumers are largely unaware of the impending costs of climate-related disasters. Mortgage lenders are also struggling to make financial sense.
“This is a big challenge for everyone to think about,” said Kristy Fercho, head of mortgage lending at Wells Fargo.
He also said that climate risk may need to be considered in mortgage underwriting.
“To date, it’s not. I think it’s something that we evaluate like the industry,” Fercho added.
Fercho just completed his term as chairman of the Mortgage Bankers Association, which issued a special report from the research institute in 2021 saying, “Climate change could increase the risk of mortgage defaults and prepayments, triggering adverse selection in the types of loans sold to the GSEs which [Fannie Mae and Freddie Mac]increasing house price volatility, and even generating significant climate migration.”
Fercho agrees, “It’s definitely influenced the way we think about mortgages and what we should do.”
The problem is that the models from different companies, as well as from government agencies like FEMA, are all different, and Hakim said the project is more difficult than expected.
So far, Hakim said, Fannie Mae has known that climate impacts vary across the country but hit vulnerable communities more than prosperous ones. It echoes a UN report, which found the worst impacts of climate change on the world’s poorest countries and islands, which are home to around 1 billion people but account for less than 1% of greenhouse gas emissions.
But Fannie Mae has yet to turn down mortgages based on climate risk.
“No, we’re not there yet,” he said. “The first step is to find out what the damage will be to each property. The second step is how can we change our behavior? And how can we change property values? That’s a lot of work we have to do. How about five more years? I’m not sure.”