Let housing market ‘slowly adjust’ to climate risk, Fannie Mae exec says – Marketplace

Nearly half of all homes in the United States are at risk of “severe or extreme” damage from events such as floods, high winds and wildfires, Realtor.com estimates. And rising insurance costs — due in part to these risks — are making homeownership less affordable in many parts of the country.

As chief climate officer at Fannie Mae, the government-sponsored mortgage finance company, Tim Judge assesses how climate change could affect housing and Fannie Mae’s large mortgage portfolio.

Judge joined Marketplace host Amy Scott to discuss insurance premiums, climate risk and housing affordability. An edited transcript of their conversation follows.

Amy Scott: What does it mean to be Fannie Mae’s Chief Climate Officer? What is your role there?

Tim Judge: Well, that means I’m responsible for understanding the impact of climate on Fannie Mae now and in the future, as well as working on strategies to address climate risk to US housing. So this means working with internal actors as well as external actors on opportunities to mitigate and promote and assist the transition to a greener economy.

Scott: What kind of risk do you see for Fannie Mae, coming not only from, you know, increased bad weather, but from the underwriting challenges that are happening in part as a result of that?

Judge: So climate change is sure to have a big impact on US housing. I think what we’re seeing in the insurance space is a clear indication of that, and insurance is now a kitchen table topic for most people in the United States. When we look at insurance, one of the things we do is our national housing survey. We asked many consumers about insurance. Two-thirds said their premiums have been affected by natural disaster events or other damage to their property due to climate-related events.

Scott: Wow.

Judge: So we keep looking at it. And I think what we’ve seen in our book, Amy, is that we still see that overall, insurance is affordable. Homeowners insurance is generally available. But that doesn’t mean there aren’t pockets of the United States that are seeing some of those big challenges.

Scott: Tell me about some of those pockets. I think a lot of people are familiar with the issues in coastal Florida, Louisiana, also in California and wildfire country, but it seems like the issue is growing and becoming something that we’re seeing in more parts of the country.

Judge: Yeah, like you said, Louisiana, California and Florida have always been the talking points. It’s in the Midwest becoming a bigger issue and it’s largely driven by what you’ve seen in the last couple of years in terms of strong convective storms in the Midwest. Last year, there were 18 to 20 severe convective storms that cost over a billion dollars. This should be reflected in the following insurance premiums. And so I think some of those new places are really where you’re starting to hear new headlines about it will impact the Midwest, where insurance wasn’t as much of an issue before.

Scott: So, as you know, some people think that the market is in a correction in places that may be overestimated because the climate risk has not really been assessed. And as insurance becomes more expensive, we could see more of those properties lose value as more people have to sell or people are less inclined to buy. What risk does this pose to Fannie Mae and thus the taxpayers?

Judge: So insurance rates have gone up because of a number of things. Inflation is a clear driver of insurance premiums across the United States. There is litigation, as we know, in Florida, with lawsuits. You mentioned California, where there have been some regulatory challenges that have driven some kind of availability issues. But the last part of this is of course climate risk. So we haven’t seen big valuation impacts because of climate change, and there are a couple of reasons, one of which is that we still have a big housing supply problem in the United States. We have very few properties in relation to demand. So that signal somewhat outweighs the climate signal at this point, frankly.

Scott: So some have said that Fannie Mae and Freddie Mac are actually subsidizing homeownership in risky areas because it costs the same to get a mortgage on the coast as it does to get one inland. Have you considered some kind of risk premium or price that would send that signal so that people are not, you know, easily able to live and, in fact, continue to live and rebuild in areas of risk?

Judge: There are several answers to this. The first is, I don’t think the analytics are at a level today to make those kinds of distinctions at the property level. We continue to work on this. As the head of modeling and chief climate officer at Fannie Mae, I have a responsibility to make sure the metrics make sense at an ownership level, and I just don’t think we’re mature at that level yet. And I think the issue of taking properties or delisting probably misses the point that we really need to think about what areas we need to invest more in in terms of resilience. As you said, we have a housing supply problem. The last thing I want is to have a lower housing supply. And in many of these communities that are at risk, you know, sustainable investment either at the community level or at the property level would make those properties still fully sustainable and safe.

Scott: Let’s talk a little more about disclosure, because it’s kind of surprising that there aren’t requirements in many communities for a seller to inform a buyer that the home has flooded in the past, for example. Is this something Fannie Mae can mandate for the mortgages it buys?

Judge: We need every state to have flood disclosures. Where it rains, it can flood, right? And we’ve seen a lot of progress lately, Vermont being the latest state to just come out with flood detections. But I think that, you know, if Fannie works with the Federal Housing Finance Agency, the Federal Emergency Management Agency, or any state agency that works together, do we need to make sure that consumers are more aware. One of the reasons why we focus so much on awareness is if you make people aware and move it into their daily lives, then we will slowly adapt to the climate that is part of our housing risk assessment. and will slowly release that air from the balloon. If we go 20 or 30 years without taking real climate action, then I think you’ve built a real challenge. And so, our real opportunity here is to make sure that we get through as quickly as possible, and so we don’t even have to think about those risks 20 or 30 years from now.

Scott: Yes, there is hope.