April 21, 2021

Enterprise Submits Comments to FHFA RFI on Climate Risk

On April 19, Enterprise submitted comments to the Federal Housing Finance Agency (FHFA) Request for Input  (RFI) on the current and future climate and natural disaster risk to the housing finance system and the regulated entities: Fannie Mae and Freddie Mac (the Enterprises) and the Federal Home Loan Banks (the FHLBanks).

The RFI comes at a time of volatility and uncertainty, where climate-related events are increasing in intensity and frequency. 2020 marks the sixth consecutive year in which ten or more billion-dollar disasters have impacted the US. Recognizing that natural disasters could lead to economic and financial disruptions, including increased default rates, credit losses as well as a decreased demand for their lending, FHFA invited experts to advise on best practices to withstand these risks.

Enterprise key recommendations to FHFA 

  • Increase awareness of foreseeable risks communities face: Enterprise recommends that the FHFA increase awareness of foreseeable risks communities face by working with the White House and Federal agencies to provide the best available science and data on climate risk uniformly across the country – at the address level. Address-level data can help identify the risks of climate-related events on properties and mortgage portfolios. The Federal Government has the true incentive to assess such risks and to protect people, properties, and financial investments from harm with a shared understanding of risk. 
  • Initiate a comprehensive national climate adaptation planning process that will guide the way the GSEs assess, underwrite, and operate mortgages: As part of FHFA’s first Strategic Goal– to ensure safe and sound regulated entities–we recommend that the Agency initiates a comprehensive national climate change adaptation planning process that will guide the way GSEs assess, underwrite, and operate mortgages. FHFA can also establish clear guidelines for banks as well as incorporate financing tools that incentivize investment in resilience and adaptation to changing climate risks. All strategies should assess risks, recommend solutions and actions to support and fund climate-resilient communities. 
  • Improve the distribution of costs across the mortgage portfolios: Considering that low- and moderate-income (LMI) borrowers may be disproportionately impacted by climate risk, it is crucial to improve the distribution of costs across the mortgage portfolios via internal cross-subsidy rather than asking LMI borrowers to pay the cost of being priced out of less risky locations. Disbursing the cost has been a policy response to low-level price adjustments, but part of the guarantee fee should also include a climate risk adjustment. Given the distributional effects of property level pricing, applying this adjustment across the system could be more effective in addressing climate risks that remain regional in nature, even if they affect individual properties. 
  • Pursue policies that mitigate adverse effects for lower-income households in vulnerable areas: FHFA must ensure that the system is not inadvertently recreating punitive policies by only focusing on climate risk. Vulnerable populations disproportionately live in areas with the highest climate risk, which also poses a risk to the affordable housing sector. To that end, we suggest the FHFA require an assessment of the intersection of units that count towards the affordable housing goals and degrees of climate risk and resilience. While this would be purely informational data for the time being, it would create a baseline for understanding the relationship between affordability and climate risk. Given the lack of affordable housing in low-risk areas, the GSEs should continue financing in higher-risk areas until an adequate affordable housing supply is available in low-risk locations. The GSEs should also provide capital, particularly in the multifamily space, for low-risk properties while ensuring properties in high-risk locations are less vulnerable to climate risk. 

Looking Forward

FHFA should be intentional in considering how any new climate risk procedures will impact the value of homes in low-income communities and communities with significant numbers of residents who are Black, Indigenous, and other people of color. In order for the regulated entities to support housing finance missions while minimizing the impact of climate and natural disaster risk, equity must be at the center of all policies and procedures – because any additional processes, procedures or changes in valuation will potentially have a negative impact on these communities.

Since many LMI families live in high-risk areas, it is crucial not to create tools that would lead to a disparate impact on LMI communities before making them more resilient or adding new affordable supply in less risky locations. Overall, recognizing that until a sufficient number of affordable alternatives exist for people, this will necessarily be a prolonged process rather than a radical policy change. 

Read Enterprise’s written comments for more detailed recommendations. 

In addition to the written comments, FHFA invited experts to testify during public listening sessions held in March. The goal of these sessions was to give interested parties an opportunity to provide input on two broad sets of issues: 1) identifying and assessing the regulated entities’ current and future climate and natural disaster risk, and 2) enhancing FHFA’s supervisory and regulatory framework of the entities’ management of risks from extreme weather events. The speakers touched on a range of issues, but one message rang clear: climate change poses a rising risk to housing markets, especially in low-income and marginalized communities.

Enterprise is pleased our own Senior Vice President of Public Policy and Senior Advisor for Resilience was invited to testify during the hearing, adding her recommendations to those from climate scientists, advocacy groups and policymakers. 

Watch the recording of the full hearing here

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