Fannie and Freddie Mortgages Vastly Underestimate Flooding Risks

Climate-induced flooding has inundated coastal cities, yet new reporting from Politico shows that government mortgage lenders like Fannie Mae and Freddie Mac continue to pump money into severely flood-prone property markets. 

As such in the Florida town of Hialeah, federal taxpayers hold greater than 60% of home mortgages. And as Politico explained, “if the homes are damaged sufficiently that their owners can’t afford to fix them, and must abandon the property, the federal government gets stuck with the house.”

Why This Matters: Homes within a “100-year floodplain” are required to carry flood insurance but increased precipitation, as well as FEMA’s outdated and inaccurate flood maps, mean that millions of American homes are built in areas that will continue to experience natural disasters but aren’t identified as such. 

This predicament is a serious economic risk: if home prices plummet and homeowners can’t find ways to make repairs on houses that are worth far less than their outstanding debt.

But here’s the bottom line as Politico noted, 

“Hialeah is just a tiny part of a much larger risk pool, but it encapsulates the conundrum facing policymakers. Homeownership rates in the city are relatively low, at less than 46 percent. Meanwhile, Fannie Mae and Freddie Mac have a congressionally approved mandate to put more people, especially those from traditionally underserved backgrounds, in homes of their own.”

This doesn’t protect taxpayers or vulnerable potential homeowners looking to purchase their first home. 

Growing Risks: As Harvard Magazine wrote earlier this summer, a paper published in Climatic Change shows that when a bank in these regions makes a loan to a homeowner in a flood-prone area, it is much more likely to repackage that mortgage into securities and sell it on the financial market. 

  • This means the buyers—whether private investors or government-sponsored entities like Fannie Mae and Freddie Mac, established to provide liquidity to the nation’s housing finance system—are taking on the financial risk of those homes flooding, without knowing what they’re signing up for. 
  • If these homes go—literally—underwater, the losses to banks, pension funds, and taxpayers could be enormous. 

Are there solutions?

There are several types of solutions to counter this risky lending, but each has its own potential drawbacks:

  • Factoring climate change into mortgage pricing would solve this financial conundrum, but would require more subjective judgments about which communities are vulnerable to devastating weather events and whether those communities are likely to invest in infrastructure such as flood walls to reduce the risk.
  • Amortizing a climate-risk surcharge across all borrowers would cover potential losses but wouldn’t stop people from living in vulnerable areas, and as climate change worsens, this surcharge may not cover damages over time. 
  • Mortgage agencies could sell “credit risk transfers,” which allows the credit risk to be placed on private agencies rather than on taxpayers. But that solution can only work for so long, since investors have put on the mortgage giants to remove loans on properties at risk of climate change from those offerings.

Because these solutions are so fraught, banks, investors, and housing officials have yet to implement any of them at large. This is exactly why financial regulations and compulsory climate risk disclosure is so necessary. Such disclosure is currently not uniform across all fifty states. For instance, Florida which is the most vulnerable state to climate risks, does not require disclosure of whether a home has suffered flood damage upon sale. 

Go Deeper: Home listing site made the decision to disclose flood risk on its website, hopefully encouraging others like Zillow and Trulia to do the same. 


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