Washington's increasing focus on climate change could create a demand for mortgage risk models that take into account the effects of global warming, according to the Research Institute for Housing America.
The task will not be easy, according to a report released Thursday by the institute, a think tank affiliated with the Mortgage Bankers Association. Research shows that while there are some measures, these are not comparable to other risk models in the industry and are not easy to expand.
"Currently, corporate efforts to quantify climate risk are likely to lag behind the accuracy of existing interest rate and credit risk disclosure models," said author Sean Becketti in the report.
This could pose challenges for the home finance industry, which is facing increased pressure to quantify the effects of climate change. Several policymakers are scrutinizing real estate exposure to environmental risks, notably pro-government secondary market investors Fannie Mae and Freddie Mac, who buy the majority of US home loans. Becketti was previously an economist at Freddie Mac.
The urgency at the state level results from the alarming increase in extreme weather-related damage to residential buildings in recent years, which has become problematic even with existing insurance coverage.
“Several studies have shown that climate events such as fires and cyclones do not cause significant losses for mortgage investors because of insurance payments and government relief. In fact, some of these events even lead to increases in value. However, as these events grow in size and scope, investors may no longer benefit from these protections, ”said Andrew Davidson, an industry advisor and analytics provider, during a virtual event his company hosted on Wednesday.
The cost and number of weather and climate-related disasters have increased over time, according to a National Oceanic and Atmospheric Administration analysis of billion dollar weather events published earlier this year. Between 2016 and 2020, the average annual cost and number of events were $ 121 billion and $ 16 billion, respectively. By comparison, the corresponding numbers over the longer period (2011 to 2020) were $ 89 billion and $ 13.5.
The Task Force on Climate Related Financial Disclosures has recommended some categorizations for risk, but the RIHA report notes that "some of the effects of climate change on housing and … finance may not fit exactly into the TCFD categories."
Climate impacts can be broken down into categories that include some of the risks the mortgage industry is already measuring, such as property damage, payment defaults, prepayments, and house prices the report.
Some concerns, such as flood risks, have been quantified from different sources in different areas, while other climate issues such as greenhouse gas emissions, heat waves or water availability may have housing construction effects that are more difficult to measure.
“It can be more difficult to relate these other risks to specific housing and… finance implications. Nonetheless, disturbances to human life of this magnitude will certainly spread through the housing system, "said Becketti in the report, which ultimately concludes:" It is evident that better and more standardized predictors of environmental risk are needed. "