MBA Report: Mortgage Market Isn’t Prepared for Climate Risk
What future risk does a changing climate present for a property? So far, lenders seem unprepared to even gauge that risk, much less mitigate a potential impact.
NEW YORK – Mortgage lenders and investors are woefully unprepared not only to mitigate their risk from climate change but to even gauge that risk, according to a new report from the Mortgage Bankers Association’s Research Institute for Housing America.
“They are anxious to figure out what to do but not sure where to go to find out,” says Sean Becketti, author of the report and former chief economist at Freddie Mac. “They are unprepared but no longer unaware.”
According to the report, climate change puts more stress on the National Flood Insurance Program (NFIP) and could increase mortgage default and prepayment risks. It could also trigger adverse selection in the types of loans sold to Fannie Mae and Freddie Mac, and increase the volatility of house prices. On a broad demographic front, climate change could even produce significant climate migration, according to the report.
The report suggests that lenders could soon start tightening standards to mitigate the risk of climate change problems.
Fannie Mae and Freddie Mac could, according to the report, require lenders to perform additional due diligence to determine the need for flood insurance. They could also force lenders to incorporate additional sources of information on flood risk, notably in areas where flood maps have not been updated recently.
As a result, FEMA may even ban Fannie or Freddie from buying loans on homes with higher flood risks, unlike current loans that largely focus risk models on credit and operating risk.
“In the case of modeling for risk, the mortgage industry still predominantly thinks of protection in terms of property and casualty risk, which is underwritten and priced by insurance companies,” says Sanjiv Das, CEO of Caliber Home Loans. “The industry doesn’t model climate risk as much and mostly relies on models from FEMA or insurance companies.”
Source: CNBC (09/23/21) Olick, Diana