CoreLogic® and BCG® investigate potential actions for GSEs to respond to FHFA’s evolving position on physical climate risk
As climate change increases the risk of physical and financial losses for banks, federal agencies are looking to secure ways to reduce these risks across the financial services industry and build a more robust and resilient housing market. In the second installment of this three-part series, BCG® and CoreLogic® explore the position of the Federal Housing Finance Agency (FHFA) on climate risk and the potential changes that lie ahead for the housing market.
The Changing Landscape of Climate Risk Reporting
As the patterns of Earth’s climate change, so too do federal directives from regulatory entities that seek to mitigate the risks posed by natural hazards.
In May of 2021, President Biden signed Executive Order 14030, which “articulates a policy to advance the disclosure of climate-related financial risk and act to mitigate that risk and its drivers while achieving a net-zero emissions economy by 2050.” Within a year, the Securities and Exchange Commission (SEC) also proposed rules to standardize climate-related disclosures for investors, and further regulations are anticipated later this year.
The Federal Reserve Bank is currently pursuing a pilot exercise with six of the nation’s largest banks to assess the resiliency of their portfolios against climate perils. The Fed wants to ensure that supervised institutions such as banks are “appropriately managing all material risks, including financial risks related to climate change.”
Similarly, the FHFA, which oversees the Government Sponsored Enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, is coming to terms with climate change and the need for greater regulations to mitigate financial and physical risks.
Actions to Reduce Climate Change-Fueled Physical Risk Exposure
Amid these growing concerns about physical climate risks and the serious accompanying financial risks that follow, the FHFA has begun to make some regulatory changes. In its 2023 scorecard for GSEs, FHFA asked these regulatory entities to bolster their climate risk management capabilities, and it is now aiming to clarify its regulations. So, what will this mean for GSEs?
To get ahead of the pending regulations, BCG and CoreLogic identified five potential actions that GSEs can take to reduce risk exposure and develop a more secure and resilient home mortgage market:
- Identify Exposure to Climate Risk:
Risk mitigation begins with knowing what’s at risk. GSEs can take steps now to measure future climate risk exposure by clearly evaluating, monitoring and reporting on their collateral.
- Understand the Impacts of Exposure:
Financial risks due to climate catastrophes are significant. In 2021, natural disasters resulted in nearly $57 billion in losses; In September 2022, Hurricane Ian alone caused an estimated $41 billion to $70 billion in insured and uninsured losses. Understanding property exposure can help GSEs make informed decisions when incorporating climate risk and mitigation into their policies and decisioning models.
- Use Data to Inform Strategy and Product Offerings:
Understanding physical risk exposure can help GSEs improve business strategies and support the development of products that increase housing resiliency, such as customer-centric “green” mortgage products and retrofit programs that need investment to motivate originators and homeowners to use at scale.
- Support and Partner With Member Banks:
GSEs should find opportunities to direct their actions on climate risk by engaging with other lenders and sharing climate risk management approaches. Supporting centralized standards, best practice guidelines and accreditation will also benefit the mortgage industry.
- Work With Regulators: With their depth and breadth of experience as lenders, GSEs can use their voices to proactively shape regulatory approaches for the housing sector.
In the face of growing climate risks and anticipated regulations, there are immediate measures that lenders can take to mitigate potential losses. Working closely with all stakeholders in the housing market ecosystem, identifying and understanding the risks they face now, and addressing these risks for the future will ensure that real estate markets remain stable and sustainable.
