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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within a “100-year floodplain” are required to carry flood insurance but increased precipitation, as well as FEMA’s outdated and inaccurate flood maps, mean that millions of American homes are built in areas that will continue to experience natural disasters but aren’t identified as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 Realtor.com made the decision to disclose flood risk on its website, hopefully encouraging others like Zillow and Trulia to do the same.
By WW0 Staff For the United States, the post-Trump, pre-COP26 road to Glasgow has been paved with ambition and humility. In a major speech, the President’s Envoy, John Kerry, previewed the results of his climate diplomacy before heading into two weeks of intense deliberations of world leaders. Speaking at the London School of Economics — […]
Next week, the COP26 climate conference in Glasgow will draw hundreds of world leaders to Glasgow to determine the path forward five years after the Paris Climate Agreement (for a primer, read this) as new science underscores the urgency. The conference aims to squeeze countries to strengthen the commitments they’ve made towards securing global net-zero […]
By Amy Lupica, ODP Daily Editor In a report released last week, the Department of Defense (DOD) confirmed that existing risks and security challenges in the US are being made worse due to “increasing temperatures; changing precipitation patterns; and more frequent, intense, and unpredictable extreme weather conditions caused by climate change. Now, the Pentagon is […]
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