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This story was originally published by Mahlgut and is included here as part of the climate desk collaboration.
When Hurricane Harvey hit Texas in August 2017, it dumped 27 trillion gallons of rain on the Houston metropolitan area and flooded about a quarter of the metropolitan area. To date, it's the wettest storm since records began in the U.S. The hurricane the research later found was 15 percent more intense and three times more likely due to climate change, causing financial hardship for thousands of families.
Fewer than one-fifth of homeowners in Harvey-affected counties had flood insurance coverage. Loan defaults soared. The number of borrowers who missed more than three mortgage payments tripled after the storm. Real estate values also suffered: A study by Freddie Mac, one of two federally backed mortgage loan companies, found that homes in Houston's 100-year floodplain were damaged after the storm for about 17.000 dollars less were sold than comparable homes outside the floodplains. Financial hardship has been felt most by low-income families and communities of color. Researchers found that homeowners in neighborhoods with a larger share of minorities were less likely to qualify for loans and federal grants to rebuild after Harvey.
Events like these have the potential to bring the entire U.S. economy to its knees, in part because mortgages are packaged into valuable financial products – so-called mortgage-backed securities – that are bought and sold on Wall Street. After the storm, market analysts found that $30 billion worth of assets were suddenly insolvent.
While this worst-case scenario did not occur, a similar pattern has emerged following subsequent hurricanes. Environmentalists and financial experts have long warned that the rising costs of natural disasters threaten the stability of financial markets and disproportionately burden communities of color.
The most vulnerable homebuyers can be directed to areas that are most vulnerable to climate change and where existing homeowners may experience downward mobility.
The federal government is now making resources available to the topic. The Federal Housing Finance Agency (FHFA), an independent regulator charged with overseeing Freddie Mac and its sister organization Fannie Mae after the 2008 financial crisis, is officially beginning to examine the risks that climate change poses to the housing market. In doing so, it faces a fundamental challenge: how to respond to climate risks while meeting its mission of ensuring affordable housing for low-income borrowers.
If the FHFA and other federal agencies succeed in raising public awareness of climate-related risks and creating uniform mortgage lending standards, it could lead to a decline in property values in high-risk areas that are often home to People of Color – places like South Chicago, Illinois; North Charleston, South Carolina; and formerly redlined parts of Sacramento, California. Vulnerable homebuyers may be directed to communities most vulnerable to climate change, and existing homeowners of color who purchased their homes when these risks were not as well understood may experience downward mobility.
Given that housing is the most important way for most Americans to build wealth, FHFA must walk a tightrope in developing policies that address climate change risks without unfairly burdening communities of color by devaluing their most valuable financial assets: their homes .
"We don't want to create a modern form of redlining where affordable places are exposed to higher risk and places where no one wants to end up," said Rachel Cleetus, policy director at the Union of Concerned Scientists, a nonprofit charitable organization.
FHFA held its first listening session on climate risk earlier this year and solicited comments from the public on how climate risk might be managed in Fannie Mae and Freddie Mac portfolios. The more than 50 comments submitted in response, which the agency has made publicly available, come from bankers, fair housing advocates, climate data analysis firms and academics. By and large, the comments emphasize the need for transparent and standardized data on risks arising from floods, wildfires, extreme heat and other climatic changes. Currently, a small group of sophisticated analytics firms package climate data into proprietary models and sell them to hedge funds and institutional investors – leaving everyone but their clients in the dark about how these powerful financial interests quantify climate risk.
The result is what researchers and policymakers call asymmetric information, a situation in which a small group of market participants has access to crucial knowledge from which they benefit to the detriment of others. In this case, insurance companies and wealthy financial institutions have access to topline climate data and can keep their investments out of high-risk areas, while the government and most ordinary investors are largely in the dark. A similar dynamic played out in the run-up to the 2007 U.S. housing market crash, when investors were unaware of the underlying risks of mortgage-backed securities.
"I'm incredibly concerned about information asymmetry," said Lindsay Owens, a fellow at the Roosevelt Institute and former economic advisor to Senator Elizabeth Warren. "You're already seeing some of the bigger banks investing here [climate] data is starting to have an advantage with consumers."
The legacy of redlining means communities of color – especially black Americans – tend to live in neighborhoods with fewer trees and inadequate stormwater infrastructure.
Two studies published last year suggest lenders are already benefiting from asymmetry and removing climate-related risks from their books. One found that local lenders in increasingly flood-prone areas were less likely to lend – unless they were able to pass those loans on to Fannie Mae and Freddie Mac, suggesting that those lenders took climate risk more seriously (or understood it better) than the government-backed companies did . A second study analyzed local banks' lending in coastal counties and found that more than half of the loans sold to Fannie and Freddie were in an area that would be flooded after sea levels rose a foot.
As a first step, Owens and other researchers want FHFA to make knowledge of climate risks accessible to the average homebuyer. However, they caution that this could exacerbate inequities. First, climate risk is disproportionately borne by communities of color. The legacy of redlining and segregation means communities of color – and black Americans in particular – live in neighborhoods with fewer trees and inadequate stormwater infrastructure , making them more likely to bear the brunt of flooding and extreme heat.
If these risks are quantified and made readily available to home buyers, it will likely lead to home devaluation, resulting in a loss of wealth in these communities. To counter price shocks, Cleetus, Owens and others advocate starting conversations at the local level about increasing investment in climate-resilient infrastructure and developing retreat plans from high-risk areas.
In comments on climate risks to FHFA, Fannie Mae and Freddie Mac pointed to their work with academics in assessing flooding and other climate risks, as well as their green bond programs, which package energy-efficient homes into "green" financial products. A Fannie Mae spokesperson did not respond to specific questions about conducting climate stress tests and scenario analyses, and the company's written comments emphasized that it is "premature" to use climate models in risk assessments.
Chad Wandler, a spokesman for Freddie Mac, said the company regularly analyzes risk using third-party natural disaster models "that estimate the physical damage caused by a range of simulated historical and potential events such as floods, hurricanes and earthquakes". Freddie Mac also assessed flood risk outside of floodplains in Federal Emergency Management Agency maps that are outdated, he said.
"People who already face major hurdles in entering the housing market will face even greater hurdles."
Fannie and Freddie already price some risk into home loans through so-called "guarantee fees". Borrowers with lower credit ratings, who are considered more likely to default, are charged higher interest rates. Similarly, higher fees are incurred for investment properties and condominiums. In comments to FHFA , Mark Hanson, senior vice president at Freddie Mac, said the company "urge[d] FHFA to allow [Fannie and Freddie] to prioritize climate risk relative to other risks the company faces, using a risk-based approach to."
However, fair housing advocates warned against simply adding climate-related risks to the list of other risks priced at the loan level. Given that high-risk areas are often formerly zoned neighborhoods and home to communities of color, pricing loans based on climate risk will lead to unfair results, they argue. Instead, they say Fannie and Freddie should raise interest rates to spread risk across the broader mortgage market so individual homeowners don't bear the cost of climate change.
"Forcing individuals to bear these costs does not promote equity," said Debby Goldberg, vice president of housing policy and special projects at the National Fair Housing Alliance. "People who already face major barriers to entering the housing market will face even greater barriers, and we will widen the racial homeownership gap and the racial wealth gap."