The blog of the Urban Institute
May 13, 2021

Three Ways the Housing Finance System Can Protect All Homeowners from the Escalating Effects of Climate Change

Climate change contributes to an ever-present reality of chronic environmental change and extreme weather events, with natural hazards because of climate change increasing in frequency and severity. In the first nine months of 2020, the United States experienced 16 disasters (including wildfires, hurricanes, tornadoes, and droughts) that caused at least $1 billion in damage each. These are bellwethers of what’s to come, and exposure to these hazards looms over our housing finance system.

As the mortgage system considers how to mitigate its financial exposure, we must develop a climate strategy that avoids modern-day redlining. This means protecting low- and moderate-income households, who rely on a stable, accessible mortgage market; are the most exposed to the effects of climate change, and are the least prepared financially. Unless policymakers take concerted, coordinated steps across numerous federal interventions—especially access to homeownership—low-income households and Black and Latinx people will bear the brunt of climate change-related hazards.

Home equity is the main source of wealth for most US households and composes an even greater share of Black and Latinx homeowners’ wealth. Many areas at risk from climate change are low income and majority Black and Latinx. Because of decades of redlining, steering, environmental degradation, and disinvestment, such communities may be hazard prone or have older, more vulnerable housing stock.

But property damage is not the only risk. Disasters also have lasting negative impacts on households’ financial health. Increases in mortgage delinquencies and foreclosures can last for years after a disaster, and credit scores can suffer. Our research shows that the credit scores of people who experience a medium disaster—that is, disasters causing less than $200 million in assessed damage under the Federal Emergency Management Agency’s Individual Assistance Program but large enough to trigger that aid—fell by almost 22 points four years later, and for those with poor credit before the disaster, the decline was even more severe. In fact, the people financially struggling before a hazard are hit hardest, regardless of the hazard type, severity, or timing.

Mindful of these and other potential consequences, the Federal Housing Finance Agency (FHFA) embarked on a national assessment in January about managing climate and natural disaster risks in the housing government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In response, the Urban Institute’s Metropolitan Housing and Communities Policy Center and Housing Finance Policy Center submitted comments encouraging the FHFA to consider climate risk, equity, duty to serve, and affordability needs collectively. If the FHFA wants to ensure the effects of climate change do not produce modern-day redlining, it could consider the following three recommendations.

1. Consider all environmental and related hazards when reviewing possible exposures to properties with GSE-securitized loans

As climate change leads to both more severe individual disasters, such as hurricanes, and slow-onset environmental effects, such as drought, the FHFA must consider how to amend its disaster management policy. Today, the slow-onset effects of climate change fall outside traditional disaster policy and do not receive the same forbearance, relief, and direct aid.   

The FHFA must also account for individual property exposure and borrower vulnerability. Although methods exist to protect against some of these risks, upgrades such as home elevation or fire resistance require resources that less affluent homeowners and communities of color lack because of inequities in access to resources and chronic disinvestment. Consequently, these homeowners are doubly vulnerable to climate hazards.

On top of the risk of climate hazard, climate-exposed areas risk declining property values because of market forces. These forces could be exacerbated by GSE actions that discourage the financing of mortgages on at-risk properties in specific neighborhoods, inevitably harming low-income and Black and Latinx communities

2. Adapt the regulatory and supervisory framework to manage climate risk by deploying the powerful tools at the GSEs’ disposal

Fannie Mae and Freddie Mac exist to “provide liquidity, stability and affordability to the mortgage market,” and the Federal Home Loan Banks are similarly charged with supporting home lending and community investment. The tools these GSEs have created to bolster and widen access to financial security must be adapted to equitably manage climate risk.

By using their duty-to-serve and affordable housing roles, these GSEs can encourage housing supply and lending for low-income households in places with less exposure and promote lending for home hazard mitigation for existing homeowners where appropriate. The GSEs can also overhaul postdisaster forbearance and relief practices to be more predictable, with consistent triggers based on the hazard’s severity and the borrowers’ circumstances, which can reduce long-term damage to those affected by climate change.

The FHFA and GSEs can take the lead in supporting and standardizing the collection and disclosure of accurate exposure data. These data should be made publicly available in understandable and timely forms to empower people, communities, and institutions to understand, prevent, plan for, and adapt to risk in tailored, appropriate ways.

To the extent pricing is used as a risk mitigation tool, it is imperative that the FHFA consider how costs can be socialized, through pooling, rather than targeted to individual communities through loan-level price adjustments (LLPAs) or third-party insurers. LLPAs can have a dramatic effect on local housing markets, which will impair local economics and tax revenues. The GSEs should minimize economic disruption to low-wealth households and communities.

3. Lead a holistic, multi-stakeholder response instead of acting in a vacuum

As regulator for the federal housing enterprises, the FHFA should reasonably take a leadership role. But the GSEs cannot approach this in a vacuum, particularly when such action could limit access to potential borrowers or jeopardize the well-being of current ones. Unilateral action would likely shift risk onto other parts of the federal government, such as the Federal Housing Administration or the National Flood Insurance Program.

Instead, the FHFA and the housing GSEs should collaborate with other federal, state, and local agencies and industry and community stakeholders to plan and provide resources for community-level decisionmaking on adaptation options that balance collective risks and protect households.

Through collective action, consideration of climate change can become a catalyst for protecting homes and taxpayers while enhancing equity and opportunity for US households.


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CARLYSS, LA - AUGUST 28: A house submerged in a lake is seen on August 28, 2020 in Carlyss, Louisiana. Hurricane Laura came ashore bringing rain and high winds to the southeast region of the state, reaching wind speeds of 150 mph and a 9-12 feet storm surge. (Photo by Eric Thayer/Getty Images)

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