Colman at politico: mispriced mortgages
"Taxpayers are backing more than a trillion dollars in home mortgages, but the agencies buying them are neglecting to consider climate risks."
“It just has not reached that level of concern. And it never does, right?”
"political, scientific, technical and social complexities that have left the taxpayer-backed mortgage market suspended in time, unwilling or unable to prepare for the inevitability of property- and wealth-destroying climate change."
"Officials at the FHFA, which oversees Fannie Mae and Freddie Mac, maintain that taxpayers are protected by flood insurance requirements."
"Turning off the mortgage spigot in communities affected by climate change would disproportionately affect people of color, whose neighborhoods are more likely to be plagued by violent weather."
"a peculiar kind of stasis — a crisis that everyone sees coming but no one feels empowered to prevent, even as banks and investors grow far savvier about assessing climate risk."
"The mortgage giants appear to be taking fledgling steps ... issued a request for proposals to analyze climate exposure to homes that are outside the 100-year floodplain, and therefore do not require flood insurance coverage"
"some current and former federal housing officials who were interviewed by POLITICO said that they interpret the charters that formed Fannie Mae and Freddie Mac as preventing officials from deciding, on their own accord, to stop buying mortgages in areas at high climate risk ... Others who occupied the same positions said the exact opposite."
"any actions taken by the two mortgage giants would be highly disruptive in themselves: A refusal to buy mortgages on homes in certain areas would potentially choke off lending in those areas, driving down housing prices ... But failing to take preventative action in anticipation of climate changes risks a far greater downturn."
"Weighing those climate-fueled dynamics would take Fannie Mae and Freddie Mac into the political minefield of place-based pricing. The companies’ charters discourage such distinctions in order to create a national mortgage market. Maintaining a largely homogeneous market helps to combat redlining policies that have deprived predominantly Black neighborhoods of access to credit, while also ensuring that rural communities have the same access to credit as urban areas that have far more lenders. "
"In the early 1990s, Fannie Mae and Freddie Mac tried to raise the price of mortgages on properties in California neighborhoods with a high risk of earthquake damage, only to backtrack in the face of furious opposition"
" Fannie Mae and Freddie Mac already maintain some forms of risk-based pricing. The lenders charge banks higher rates — known as “guarantee fees” — when a borrower’s credit history signals a greater default risk."
"Making those decisions would put the mortgage giants in a position to write off whole communities ... many Black communities are situated in low-lying areas as a result of racist historical policies. "
“That we are rapidly growing places that are just right there in the bull's-eye of climate change just doesn’t make any sense.”
"The mortgage giants have already made an implicit decision to distort the market by not pricing climate risk ... They extend more financing to climate-vulnerable borrowers than the properties are worth. Thus they put taxpayer dollars and American lives in the crosshairs of extreme weather and storms. "
"Fannie Mae and Freddie Mac have no designated financial buffer for offsetting climate-related losses"
"This sets up the possibility that banks would deliberately sell off mortgages in areas with climate risks to Fannie Mae and Freddie Mac — which can’t refuse them, given the mandate to provide market liquidity — while keeping the sturdier loans on their own books."
"Banks such as Wells Fargo, Morgan Stanley, Citigroup and Bank of America acknowledged in response to questions from Sen. Elizabeth Warren (D-Mass.) that they are using new tools and services to gauge climate risk"
" if the bank ever becomes convinced of the inevitability of climate change in certain places, it could simply flip any loans in those places to Fannie Mae and Freddie Mac, which would be obligated to buy them. That means taxpayers would be guaranteeing the risk rather than private lenders."
“We don’t do that today … but that is certainly something I have contemplated.”
“Until those loans that are in zip codes that have flood risk trade at a discount to other loans, [Fannie Mae and Freddie Mac] won’t care ... But since there’s a guarantee to credit risk, [investors] don’t care.”
"The fear is that, if the properties are destroyed, Fannie Mae and Freddie Mac would indeed pay off the mortgages immediately. But that would deprive investors of the benefits of interest over the longer term."
"these assets have been priced irresponsibly"
"As Hurricane Harvey barreled down on Texas in 2017, securities that Fannie Mae and Freddie Mac sell to private investors in what’s known as a “credit risk transfer” went haywire, spiking 150 basis points — or 1.5 percent — amid fears that the storm would obliterate entire communities. When the credit risk transfer market settled after Harvey, the Association of Mortgage Investors, a trade group representing mortgage securities buyers, asked Fannie Mae and Freddie Mac to remove mortgages vulnerable to climate change from those offerings."
" unlike with most of the mortgage-backed securities that the mortgage giants sell, private buyers take the loss on credit risk transfers if mortgages default. The idea is to relieve taxpayers of the risk of having to cover for potential losses, putting it on private investors instead. But that solution can only work for so long, especially given the pressure investors have put on the mortgage giants to remove loans on properties at risk of climate change from those offerings"
"Fannie Mae and Freddie Mac took the loans out of the credit risk transfer pool, he said, letting climate-vulnerable mortgages pile up on their own books."
https://www.politico.com/news/2020/11/30/climate-change-mortgage-housing-environment-433721sidd