The Next Big Short: Climate Fuels Real Estate Time Bomb

December 1, 2020

Very impressive investigation in Politico – risk exposure to housing market, and entire financial system, from climate-driven storms and floods.

Very much a topic in my conversation with Kerry Emanuel last winter.


But behind the vibrant life in Hialeah (Florida) is a troubling reality: flooding. Heavy rains overran the streets this year, last year — almost every year. And the problem is projected to get worse: Some scientists fear the city could be underwater within the lifetimes of some current residents.

Despite that grim prognosis, the federal government keeps pumping mortgage money into Hialeah, as it does in hundreds of other communities now facing grave dangers from climate change. Fannie Mae and Freddie Mac hold the majority of home mortgages in some Hialeah neighborhoods. More significantly, federal taxpayers hold greater than 60 percent of mortgages on homes in some areas outside the specially designated federal floodplain, according to an analysis of federal data by Amine Ouazad, an associate economics professor at Canadian business school HEC Montréal.

That’s important because being outside the so-called “100-year floodplain” means homes aren’t required to carry flood insurance. Thus, 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. That’s a relatively small risk in a time of rising real estate values, when families can use their home equity to take out repair loans, but a potential economic disaster if home prices start to plunge and owners can’t find ways to make repairs on houses that are worth far less than their outstanding debt. And there are compelling reasons to believe that climate risks are starting to catch up to the real estate market in Hialeah and beyond.

Buyers and lenders are now able to assess the risks of climate change damage by using simple apps — a technological revolution that is placing a warning label on millions of properties from seaside New England to low-lying areas vulnerable to hurricanes across the Southeast to the arid, fire-prone hills of California. And once buyers start refusing to pay top dollar for such homes — and insurers stop underwriting policies on them — the more than trillion-dollar Fannie-Freddie portfolio could take an enormous hit, big enough to knock the economy into recession or worse.

POLITICO interviewed federal officials in charge of housing policy, decision-makers at major U.S. banks, former chief operatives at Freddie Mac, Fannie Mae and the Federal Housing Finance Agency, investors in fixed-income securities like mortgage pools, analysts building new products that measure climate risk, think tank experts and academics to understand the 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.

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.

Officials at the FHFA, which oversees Fannie Mae and Freddie Mac, maintain that taxpayers are protected by flood insurance requirements. Parts of Hialeah, though, don’t fall into the floodplain, a result of outdated maps that do not consider future flood scenarios arising from climate change — a problem that, policymakers maintain, is replicated in communities across the country. But pricing climate change into mortgage terms would wreak havoc in the real estate market — a hit that, while protective of taxpayers in the long run, runs counter to the missions of the relevant agencies. 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.

The result, many current and former federal housing officials acknowledge, is 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.

“At some point, it’s going to crystallize and everyone’s going to pull out” of homes facing climate risks, said Ed Golding, a former Freddie Mac executive who ran the Federal Housing Administration during the Obama administration. “It will be a crisis that will have to get everybody to react.”

As with most aspects of climate change, there’s a lack of certainty: Mortgage assessors can’t say exactly when and exactly where life- and property-destroying events will occur, even if they know the risks of them will increase. 

A further reason for caution is that 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. For those already owning homes in those areas, equity could disappear overnight. Some owners, realizing their homes were worth less than their mortgages, might simply refuse to pay, triggering foreclosures and igniting some of the forces that created the financial crisis of 2008-2009.

But failing to take preventative action in anticipation of climate changes risks a far greater downturn.

Much, much more valuable history and analysis at the link. Highly recommended.

One Response to “The Next Big Short: Climate Fuels Real Estate Time Bomb”

  1. Brent Jensen-Schmidt Says:

    Not on topic.
    Ozstrlia has just experienced it’s hottest November on record and apparently it’s hottest spring. This in a La Nina situation.
    Last December, the all time continental temperature record was broken three days straight. Note December is the start of summer and not known for extreme temperatures, nor never happened before, multi state crown fires/fire storms.
    CAGW is here gals and guys!

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