A report has raised concerns that US mortgage market stakeholders, including lenders, investors and insurers, are woefully unprepared for the accelerating climate change and the risks it poses.
Not only are lenders and others unprepared to mitigate their risk, but according to the Mortgage Bankers Association’s Research Institute for Housing America report, they are unable even to properly assess the risk they are facing.
“They’re anxious to find out what to do but don’t know where to go,” said Sean Becketti, author of the report and a former economist at Freddie Mac. “You are unprepared, but no longer aware of it.”
The world of home finance involves many players, not just mortgage lenders and administrators. Consumers, landlords, builders, appraisers, insurance companies, mortgage investors, government agencies, and the government sponsored Fannie Mae and Freddie Mac all play a vital role.
The report says climate change will put significant pressure on a long and complex financial network.
Most of the pressures will come from increased mortgage default and prepayment risks, resulting in an unfavorable selection of the loans sold to GSEs. It will also lead to more volatile house prices and significant climate migration, the report said.
Lenders who securitize their loans with the GSEs face additional costs for representation and warranty insurance to cover breaches of contract or guarantees on large financial transactions. They will also be at greater risk as the GSE revises their requirements in response to climate change.
For example, the GSEs may insist that lenders do additional due diligence to determine if flood insurance is required for a home loan. The delay in updating official flood maps is likely to force lenders to seek additional sources of information. As a result, GSEs may not be allowed to purchase loans on homes that have been identified as being at high risk of flooding.
In the meantime, the ongoing revision of the National Flood Insurance Program will result in changes in prices for homeowners, which will affect both the home value and the value of the mortgages on those homes.
Becketti said the biggest problem facing mortgage players right now is uncertainty. “They wonder, more than anything, what to do next,” he said. “There have not been any rule changes affecting companies in the mortgage market, but they are being considered.”
One reason for the uncertainty is that the mortgage market relies on outdated models to assess its risk. Most of these models focus on credit and operational risks that are written and priced by insurance companies or the Federal Emergency Management Agency.
The problem with FEMA and some insurers is that they are already stressed out due to the record number of natural disasters in recent years. If FEMA changes its risk models as expected, lenders would face further losses, the report said.
Of course, borrowers displaced by natural disasters are also more likely to default on their home loans.
In 2017, after Hurricane Harvey hit Houston, mortgage industry leaders warned of a potential climate crisis. Almost 100,000 homes were flooded, but 80% of those properties did not have flood insurance as the area was classified as not at risk of flooding. CoreLogic data shows that bad home mortgage defaults are up 200% this year.
Banks, lenders, investors and mortgage service providers alike use the cost of estimated defaults as a key factor in assessing profitability, credit risk reserves and economic capital.
“If incremental defaults due to climate change are found to be material to one or more of these stakeholders, regulators and investors will likely require those stakeholders to quantify the impact of these incremental defaults and measure the sensitivity of those estimates to key assumptions,” wrote Becketti.
There is also the risk that Pfandbrief investors will withdraw from the mortgage market and that less liquidity will be available to them. Many have already started asking lenders for more information about climate risk.
For example, the Securities and Exchange Commission posted a letter to publicly traded companies last week asking them to provide investors with more information about their climate risk. She is particularly interested in the physical and financial risks of climate disasters as well as the risks from climate-related changes in regulations and business models. The letter does not name the specific companies it was addressed to, but it is likely that the banking industry is a recipient.
source https://www.bisayanews.com/2021/09/26/report-warns-mortgage-industry-is-unprepared-for-climate-change-realtybiznews-real-estate-news/
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