Climate Change Threatens the 30-Year Mortgage

Steve Helber/AP

CBS News reported last fall that climate change could punch a hole through the financial system by making 30-year home mortgages — the lifeblood of the American housing market — effectively unobtainable in entire regions across parts of the U.S.

Recent reporting from the New York Times goes further to explain that homebuyers are increasingly using mortgages that make it easier for them to stop making their monthly payments and walk away from the loan if the home floods or becomes unsellable or unlivable.

  • More banks are getting buyers in coastal areas to make bigger down payments — often as much as 40%.
  • Banks are also getting these mortgages off their own books by selling them to government-backed buyers like Fannie Mae, where taxpayers would be on the hook financially if any of the loans fail.

Why This Matters: The housing market doesn’t adequately account for the risks of climate change. For instance, mortgage lenders, portfolio managers and buyers of mortgages don’t take into account climate-induced floods, except to determine if a house sits in a 100-year floodplain at the time the mortgage is issued. But once that risk is reflected, mortgages may become much more difficult for Americans to attain.

Banks are moving quickly to transfer mortgages with flood risks off their books. As the New York Times explained, tellingly, the lenders selling off coastal mortgages the fastest are smaller local banks, which are more likely than large national banks to know which neighborhoods face the greatest climate risk. It’s because these small banks are more aware of localized climate change risks.

The Future: Michael Berman, a former official with the U.S. Department of Housing and Urban Development and former chairman of the Mortgage Bankers Association told CBS that he predicts lenders could “blue-line” entire regions where flood risks are high — a reference to redlining, the practice of refusing mortgages to minorities. 

Additionally, in 30 years from now, if global-warming emissions follow their current trajectory, almost half a million existing homes will be on land that floods at least once a year.

The Flood Insurance Problem: Politico wrote earlier this year that in order to reduce risk, the mortgage companies rely on another government enterprise, the National Flood Insurance Program, to cover the cost of flood damage to homes with Fannie and Freddie mortgages. But the flood insurance program itself is insolvent after years of paying out more than it collects. When Congress tried to fix the program in 2012, it was forced to backtrack after flood insurance premiums billed to homeowners spiked.

  • Between 2006 and 2018, nearly 600,000 houses were built in 100-year floodplains, bringing the total to 4.1 million homes. In that same time period, 300,000 mortgages were added to homes in floodplains, bringing the total number of loans to 7 million.
  • As residential construction and lending have risen in tandem, they’ve outpaced insurance. The number of taxpayer-backed flood insurance policies in effect nationwide peaked in 2006 at 5.5 million after Hurricane Katrina. But by 2018, there were only 5.2 million policies in effect.

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