Nearly half of all U.S. homes The risk of “severe or extreme” damage from disasters like flooding, high winds and wildfires, according to estimates from Realtor.com, is also driving up insurance costs and making homeownership unaffordable in many parts of the country.
As Fannie Mae Chief Climate OfficerTim Judge of Fannie Mae, the government-sponsored mortgage finance company, is assessing how climate change will affect homes and Fannie Mae’s vast mortgage portfolio.
Judge discussed insurance costs, climate risks and home affordability with “Marketplace” host Amy Scott. An edited transcript of the conversation is below.
Amy Scott: What does it mean to be Fannie Mae’s Chief Climate Officer and what is your role there?
Tim Judge: Well, that means I am responsible for understanding the current and future climate impacts for Fannie Mae and working on strategies to address climate risks to America’s housing. That means collaborating with internal and external stakeholders on opportunities to mitigate, accelerate and support the transition to a greener economy.
Scott: You know, what risks do you see for Fannie Mae, not just from an increase in severe weather, but also from the insurance challenges that are partly a result of that?
judge: Climate change is certainly going to have a big impact on housing in the United States. I think what’s happening in the insurance industry is a clear sign of that. Insurance is now a topic that’s close to home for most people in the United States. When we think about insurance, one of the things we do is the National Housing Survey. We asked a lot of consumers about insurance. Two-thirds said natural disasters have affected their insurance premiums. or if any damage occurs to your property as a result of a weather-related event.
Scott: oh.
judge: So we continue to look at that. And what we found in our book, Amy, is that overall, insurance remains affordable. Overall, homeowners insurance is available. But that doesn’t mean that there aren’t pockets of the United States that are facing significant challenges.
Scott: Tell us about those areas. I think a lot of people are aware of the issues in coastal Florida, Louisiana, California, and areas that are prone to wildfires, but it seems like this problem is growing and we’re seeing it in more and more areas of the country.
judge: So, you’re right, Louisiana, California, Florida have always been at the center of the discussion. It’s becoming a big issue in the Midwest, and that’s primarily due to the severe convective storms that we’ve seen in the Midwest over the last few years. Last year, we had 18-20 severe convective storms that caused over a billion dollars in damages. That has to be reflected in premiums going forward. So I think some of these new locations are where we’re really starting to hear new headlines that are impacting the Midwest, where insurance wasn’t as much of an issue before.
Scott: You know, some believe we could see a market correction in areas that may be overvalued because climate risk has not been fully priced in. And as insurance costs rise, it increases the likelihood that these properties will fall in value as more people are forced to sell or are less willing to buy. What risks does this pose to Fannie Mae and ultimately to taxpayers?
judge: There are a couple of reasons why premiums have skyrocketed. Inflation is obviously driving up premiums across the US. You know, Florida has litigation issues. California, as you mentioned, has regulatory challenges that are leading to housing supply issues. But that last factor is definitely climate risk. We’re not seeing a big impact on valuations from climate change. There are a couple of reasons, but one of them is that we still have a big problem with housing supply in the US. There are too few homes for the demand. So, frankly, the climate signal is a little bit more important than the climate signal at this point.
Scott: Fannie Mae and Freddie Mac You’re actually subsidizing homeownership in high-risk areas, because it costs the same to get a mortgage on the coast as it does to get a mortgage inland. Have you considered some kind of risk premium or pricing that would send a signal so that people can’t easily live in high-risk areas and actually stay and rebuild?
judge: There are a couple of answers to that. First, I don’t think our current analysis is at a level where we can make that kind of property-level distinction. We continue to work on that. As Fannie Mae’s head of modeling and chief climate officer, I have a responsibility to make sure that the metrics make sense at the property level, and I don’t think we’re there yet. Also, I think the issue of delisting properties or neighborhoods misses the point that we really need to think about which neighborhoods we need to invest more in from a resilience perspective. As you say, we have a housing supply issue. The last thing I want is for housing supply to decrease. And in many of these communities that are at risk, making resilience investments at the community or property level can make those properties completely sustainable and safe.
Scott: Let’s talk a little bit more about disclosures because, for example, it’s surprising that in many areas, a seller isn’t required to inform a buyer that the home has flooded in the past. Is this something that Fannie Mae could require for purchase-to-own mortgages?
judge: States need to do flood disclosures. If it rains, there’s a chance of flooding. There’s been a lot of progress recently, and Vermont is the latest state to do flood disclosures. But whether Fannie is working with the Federal Housing Finance Agency or the Federal Emergency Management Agency, or working with other state agencies, I think we need to increase consumer awareness. One of the reasons we’re working so hard on awareness is because by raising awareness and getting people to incorporate it into their daily lives, we’re going to gradually get used to climate being part of the risk assessment for their home, and the air will gradually let out of the balloon. I think we’re going to have a big challenge if we don’t take real climate action for 20, 30 years. So our real opportunity here is to make the transition as quickly as possible so that in 20, 30 years we don’t even have to think about those risks.
Scott: Yeah, I hope so.
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