How homeowners of color are threatened by climate change
When Hurricane Harvey hit Texas in August 2017, it dumped 27 trillion gallons of rain over the greater Houston area, covering about a quarter of the metro area. To this day, it remains the wettest storm on record in the United States. The hurricane, which research later found was 15% more intense and three times more likely due to climate change, caused financial hardship for thousands of families.
Less than a fifth of homeowners in Harvey-affected counties had flood insurance. Mortgage delinquencies have skyrocketed. The number of borrowers who missed more than three mortgage payments tripled in the wake of the storm. Property values have also been hit: A study by Freddie Mac, one of two federally-backed mortgage companies, found homes in Houston’s century-old floodplain were selling for around $ 17,000 less. than comparable homes outside the floodplain after the storm. The financial distress has been felt most severely by low-income families and communities of color. The researchers found that homeowners in neighborhoods with a higher proportion of minority residents were less likely to qualify for loans and federal grants to rebuild after Harvey.
Events like this have the potential to bring the U.S. economy as a whole to its knees, in part because mortgages are packed into valuable financial products – so-called mortgage-backed securities – which are bought and sold on Wall Street. After the storm, market analysts found that $ 30 billion in assets was suddenly at risk of default.
While this worst-case scenario did not unfold, a similar pattern emerged after subsequent hurricanes. Conservationists and financial experts have long warned that the rising costs of natural disasters threaten the stability of financial markets and disproportionately burden communities of color.
The federal government is now devoting resources to this issue. The Federal Housing Finance Agency, or FHFA, an independent regulator tasked with overseeing Freddie Mac and his sister organization Fannie Mae after the 2008 financial crisis, is beginning to formally examine the risks climate change poses to the housing market. In doing so, it faces a fundamental challenge: how to respond to climate risks while fulfilling its mandate of ensuring the availability of affordable housing for low-income borrowers.
If the FHFA and other federal agencies are successful in educating the public about climate-related risks and creating uniform mortgage lending standards around the problem, it could lead to lower property values in high-risk areas. that are often home to people of color – places like South Chicago, Illinois; North Charleston, South Carolina; and formerly red parts of Sacramento, California. Vulnerable homebuyers may be referred to communities most sensitive to climate change, and existing homeowners of color who purchased their homes when these risks were not as well understood may experience downward mobility.
Since housing is the primary means by which most Americans create wealth, the FHFA will have to walk a tightrope if it is to design policies that address the risks of climate change without unfairly weighing down communities of color by devaluing. their most valuable financial assets: their homes.
“We don’t want to create a modern form of redlining where affordable places are places of higher risk and places where no one wants to land,” said Rachel Cleetus, policy director of the Union of Concerned Scientists, a non-profit science advocacy organization.
The FHFA held its first climate risk listening session earlier this year and solicited comments from the public on how it could manage climate risk in the portfolios of Fannie Mae and Freddie Mac. The more than 50 comments submitted in response, which the agency has made public, come from bankers, fair housing advocates, climate data analysis companies and academics. In general, the comments stress the need for transparent and standardized data on the risks associated with floods, forest fires, extreme heat and other climate changes. Right now, a small group of sophisticated analytics companies bundle climate data into proprietary models and sell it to hedge funds and institutional investors – and leave everyone except their clients in the dark. of how these powerful financial interests quantify climate risk.
The result is what researchers and policy makers call asymmetric information, a situation in which a small group of market players gain access to crucial knowledge that they profit at the expense of other parties. In this case, insurance companies and wealthy financial institutions have access to key climate data and are able to divert their investments from high-risk areas, while the government and most mainstream investors are largely in the lurch. ‘ignoring. A similar dynamic unfolded in the run-up to the 2007 US real estate crash, when investors were unaware of the underlying risks of mortgage-backed securities.
“I am extremely concerned about the asymmetry of information,” said Lindsay Owens, fellow of the Roosevelt Institute and former economic adviser to Senator Elizabeth Warren. “You are already starting to see some of the biggest banks investing in this [climate] data is starting to get a head start on consumers.
Two studies published last year suggest that lenders are already capitalizing on asymmetry and removing climate risks from their books. One found that local lenders made fewer loans in increasingly flood-prone areas – except when they could transfer those loans to Fannie Mae and Freddie Mac, suggesting these lenders were taking climate risk more seriously (or understood it better) than government – supported entities. A second study analyzed loans from local banks in coastal counties and found that more than half of the loans sold to Fannie and Freddie were in an area that would be inundated after 30cm of sea level rise.
As a first step, Owens and other researchers want the FHFA to make knowledge about climate risks accessible to the average buyer. However, they warn that this could exacerbate inequalities. On the one hand, climate risk is borne disproportionately by communities of color. The legacy of redlining and segregation means that communities of color – and particularly black Americans – live in neighborhoods that have fewer trees and inadequate stormwater infrastructure, making them more likely to suffer. the brunt of flooding and extreme heat.
When these risks are quantified and made readily available to homebuyers, it is likely to cause homes to devalue, resulting in loss of wealth in these communities. To counter price shocks, Cleetus, Owens and others advocate starting conversations at the local level about increasing investment in climate-resilient infrastructure and developing plans to exit high-risk areas.
In comments submitted to the FHFA on climate risks, Fannie Mae and Freddie Mac highlighted their collaborations with academics to assess flooding and other climate risks, as well as their green bond programs, which bundle energy efficient homes into products. “green” financials. A spokesperson for Fannie Mae did not answer specific questions about performing climate stress tests and scenario analyzes, and the company’s written comments stressed that it would be “premature” to use climate models in risk assessments.
Chad Wandler, spokesperson for Freddie Mac, said the company periodically analyzes risk using third-party natural disaster models “which estimate physical damage resulting from a series of simulated historical and potential events such as floods, hurricanes and earthquakes “. Freddie Mac also assessed the risk of flooding outside of flood-prone areas on Federal Emergency Management Agency maps, which are out of date, he said.
Fannie and Freddie already incorporate certain risks in mortgage loans via “guarantee fees”. Borrowers with lower credit scores, who are considered more likely to default, are charged higher interest rates. Likewise, investment properties and condominiums incur higher costs. In comments submitted to the FHFA, Mark Hanson, senior vice president of Freddie Mac, said the company “urges[d] FHFA to enable [Fannie and Freddie] prioritize climate risk over other risks the company faces using a risk-based approach.
Fair housing advocates, however, have cautioned against simply adding climate risk to the list of other risks assessed at the loan level. Since high-risk areas are often formerly demarcated neighborhoods and are home to communities of color, adding a price adjustment to loans based on climate risk will lead to inequitable results, they argue. Instead, they say Fannie and Freddie should raise interest rates to spread risk across the entire mortgage market, so that individual homeowners don’t bear the costs of climate change.
“Forcing individuals to bear these costs does not advance equity,” said Debby Goldberg, vice president of housing policy and special projects at the National Fair Housing Alliance. “People who already face great barriers to accessing the housing market will face even greater barriers, and we will increase the racial property gap and the racial wealth gap. “