U.S. taxpayers could be on the hook for billions of dollars in climate-related property losses as the government backs a growing number of mortgages on homes in the path of floods, fires and extreme weather.
Violent storms and sunny-day flooding are on the rise, and more houses are being built on at-risk land. But fewer people are buying federally backed flood insurance despite requirements that homeowners in flood plains be insured if their mortgage is backed by taxpayers.
In short, the government’s biggest housing subsidies — mortgage guarantees and flood insurance — are on course to hit taxpayers and the housing market as the effects of climate change worsen, a POLITICO analysis finds. A series of disasters in a single region could trigger a full-blown housing crash.
“Where catastrophe happens and physical climate really manifests itself, the public tab will end up carrying this,” said Ivan Frishberg, vice president for sustainability banking with Amalgamated Bank. “Everyone is exposed in this. I’ve had conversations with all of the big banks and we are kind of all aware of this.”
That scenario has a growing collection of finance experts, progressives and congressional Democrats pressuring financial institutions and their regulators to give more weight to the systemic risks of climate change.
To understand the risk, consider Fannie Mae and Freddie Mac, the government-sponsored, taxpayer-backed enterprises that stand behind roughly half of the nation’s $11 trillion in residential mortgages. For decades, the companies have bought and guaranteed home loans in floodplains and other places vulnerable to natural disasters.
To reduce risk, the companies rely on another government enterprise, the National Flood Insurance Program, to cover the cost of flood damage to homes with Fannie and Freddie mortgages. But the flood insurance program itself is insolvent after years of paying out more than it collects. When Congress tried to fix the program in 2012, it was forced to backtrack after flood insurance premiums billed to homeowners spiked.
Despite public reassurances that the risk of climate-related loss was minimal and insured, Fannie Mae sounded an alarm at least as early as 2017, according to a confidential document obtained by POLITICO..
“[O]ur potential exposure to flooding-related risk may not be fully captured under NFIP insurance coverage,” the company wrote in a request for proposals that sought to put a dollar value on its flood-related risk. The previously unreported solicitation set a deadline of April 2017 for vendors to submit a report, according to a consultant who received the request but was not chosen for the job.
Freddie Mac chief economist Sean Becketti had acknowledged as much in a report a year earlier.
“Some of the varied impacts of climate change — rising sea levels, changing rainfall and flooding patterns, increasing temperatures — may not be insurable,” Becketti wrote. “As a result, some important features of housing finance may have to change.”
A Freddie executive said the company “conduct[s] significant data-driven analyses of the impacts of natural disasters.” A spokesman for the Federal Housing Finance Agency, which regulates the companies, said the companies “are proactively assessing potential risks and exposures from natural disasters.”
Fannie and Freddie have long been a deadly third rail in U.S. politics, especially after the 2008 housing collapse led to their $190 billion bailout. Since April 2019, the companies have been under the regulatory oversight of one of their biggest critics, Mark Calabria, a free-market economist who now leads the Federal Housing Finance Agency.