According to a damning assessment just released by the United Nations Intergovernmental Panel on Climate Change, global warming has already inflicted permanent damage to the earth’s ecosystems and communities.
The devastation is spreading to the home market in the United States, which has recently experienced extraordinary snow and flooding in California, as well as uncommon winter tornadoes in the south. All of this came after Florida had one of the deadliest hurricanes on record last year.
These changes have far-reaching consequences for the nation’s almost $12 trillion mortgage industry.
Hurricane winds are becoming stronger, ordinary storms are becoming wetter, and wildfires are spreading faster — and millions of houses in the United States are in the path of it all. Yet, the property market does not currently factor in climate risk. According to new research published in the journal Nature Climate Change, residences in the United States that are only at risk of flooding may suddenly be overvalued by $200 billion.
Fannie Mae, which guarantees more than 40% of all residential mortgages, might bear a large portion of the risk. According to Tim Judge, the mortgage giant’s top climate officer, mortgage underwriting does not now account for climate risk. As a result, he is launching a significant endeavor — essentially a defense — to determine the precise climate risk to Fannie Mae’s balance sheet, so that it can eventually incorporate that risk into mortgage underwriting.
“I think there’s still more we need to do, and I think we just don’t have the analytics now,” Judge said.
To assist, Judge is working with climate risk modeling firms such as First Street Foundation and Jupiter Intelligence, among others, to determine how to include climate risk in home valuations and mortgage underwriting.
First Street, for example, examines climate risk from floods, fire, and wind and applies it to particular properties. Jupiter does research on neighborhoods and communities.
Yet, the job cannot arrive soon enough. According to new CoreLogic research, the expected number of U.S. residences seriously impacted by climate-related disasters will climb from fewer than a million in 2030 to more than 62 million by 2050 if present climate trends continue. In monetary terms, that equates to losses ranging from slightly under $200 million to close to $9 billion in any given year.
Customers are generally unaware of the potential future expenses associated with climate-related calamities. Mortgage lenders are likewise trying to understand the numbers.
“It’s a tremendous challenge for all of us to truly think about,” said Kristy Fercho, Wells Fargo’s head of mortgage financing.
She also believes that climate risk should be considered in mortgage underwriting.
“It hasn’t so far. “I believe it’s something we’re assessing, just like the industry,” Fercho continued.
Fercho recently served as chair of the Mortgage Bankers Association, which stated in a special report from its research institute in 2021 that “climate change may increase mortgage default and prepayment risks, trigger adverse selection in the types of loans sold to the GSEs [Fannie Mae and Freddie Mac], increase the volatility of house prices, and even produce significant climate migration.”
“It’s obviously influencing how we think about mortgages and what we need to do,” Fercho said.
The problem is that the models from the various corporations, as well as from government agencies like FEMA, all disagree greatly, and Judge claims that this has made the undertaking more difficult than he anticipated.
According to Judge, Fannie Mae has learned so far that climate impact varies greatly across the country but affects vulnerable neighborhoods significantly more than wealthy ones. That reflects a UN assessment that concluded climate change has the greatest impact on the world’s poorest nations and islands, which are home to over 1 billion people but contribute to less than 1% of greenhouse gas emissions.
But, Fannie Mae is not yet rejecting mortgages exclusively on the basis of climate risk.
“No, we aren’t there yet,” he replied. “The first stage is to determine how much damage each property will sustain. The second stage is to consider how this will affect our conduct. And how will this affect property valuations? That is a significant portion of the work we must complete. Is it really five years away? “I’m not certain.”