Earlier this year, the US Federal Housing Finance Agency (“FHFA”) issued a Request for Input (“RFI”) on the risks of climate change and natural disasters to the national housing finance markets.1 As we discussed in our prior Legal Update, the RFI posed 25 questions on how FHFA can best identify, assess and respond to those risks for the entities FHFA regulates (Fannie Mae, Freddie Mac and the Federal Home Loan Banks) and the housing finance markets in general. Comments were due on April 19, 2021. The RFI is one of a series of recent actions by the federal government to address the financial risks posed by climate change.2 Most recently, on May 20, 2021, President Biden issued an executive order requiring the federal government to take several actions to identify and address the financial risks posed by climate change.3

FHFA received over 50 comments in response to its RFI from a variety of stakeholders, including nonprofit organizations, trade associations, insurance companies, mortgage bankers, academic organizations, Fannie Mae and Freddie Mac (“the Enterprises”), the Federal Home Loan Bank of Dallas, energy providers and other entities with an interest in housing finance and climate change issues.4

Most of the commenters generally suggested that FHFA should work with other regulators, industry and climate change experts to understand the risks of climate change and natural disasters and develop consistent and coordinated strategies to mitigate such risks as appropriate and necessary.5 Several commenters also suggested that FHFA work with government agencies and other stakeholders to develop more accurate flood risk models and maps and/or increase access to more affordable flood insurance options.6 Numerous commenters stressed that low- and moderate-income borrowers are the most vulnerable to impacts from climate change and natural disaster events as well as to changes in policy and pricing to address these events.7 These commenters recommended that FHFA work to ensure these borrowers and vulnerable communities are not disproportionately and negatively impacted by increases in insurance premiums, rising housing costs and lowered property values. Several commenters also cautioned that, to the extent FHFA relies on or requires the use by the Enterprises of climate change and/or catastrophic risk models, FHFA should do so carefully and transparently, recognizing the limitations and potential implications of such models.8

Commenters also touched on discrete issues of interest to particular stakeholders. For example, insurers and the Enterprises recognized the risks to the regulated entities and to the industry generally posed by increased mortgage loan default rates and damage to secured properties.9 The Enterprises and others, such as the Mortgage Bankers Association (“MBA”), urged FHFA to balance the need to manage climate change and natural disaster risks with the regulated entities’ need to fulfill their charter mandates.10 Further, Fannie Mae suggested that if FHFA develops regulations for climate risks, FHFA should account for the different climate risk profile for the Enterprises relative to large banking institutions and insurance companies.11 Fannie Mae argued that the primary climate risk for banks and insurance companies is transition risk that impacts asset valuations and corporate lending, resulting in stranded assets. In contrast, the primary risks to the Enterprises are physical risks, both acute and chronic, that can damage homes and decrease home prices over the Enterprises’ 30-year mortgage guarantees.12 Several insurance companies commented that FHFA should work with the Enterprises and other regulators to identify and work to close home and hazard insurance protection gaps, such as by requiring the Enterprises to release additional data on natural disaster risks to allow insurers to analyze risk exposure.13

On some subjects, commenters expressly disagreed. For example, the Union for Concerned Scientists argued that FHFA should incorporate the potential for abrupt repricing of properties exposed to extreme weather and climate change-related disasters into its regulations, while the American Bankers Association argued against the FHFA doing so at this time, without careful coordination with stakeholders, because of the risk of significantly reducing the availability of mortgage credit and the value of existing properties.14

Although the comments reflect some disagreement on the specific approaches FHFA should take, almost all stakeholders expressed support for FHFA taking some action to identify and address the risks of climate change and natural disasters. Commenters agreed that natural disasters have caused substantial damage to mortgaged properties and continue to pose significant risks that are not sufficiently managed under the current market and regulatory framework.

FHFA sought these comments to strengthen its ability to identify and assess the Enterprises’ risk from climate change and natural disaster, as well as to obtain input on how to regulate and supervise the regulated entities’ management of these risks. FHFA has not yet issued any responses to the comments or announced whether or how the comments may influence future policymaking decisions. The issuance of the RFI, however, indicates that FHFA is seriously considering measuring and addressing the risks that climate change and natural disasters pose to the regulated entities and the national housing finance markets generally. Further, given the consensus that FHFA should identify and address these risks, FHFA is likely to continue engaging with stakeholders on these issues.

While FHFA is seeking input on climate change and natural disaster risks on a federal level, state lawmakers are seeking to address the same issues in their own states. In California, SB-449 proposes requiring banks, credit unions, lenders and insurers to prepare publicly available annual climate-related financial risk reports beginning on December 31, 2022.15 The bill also proposes creating an advisory group to prepare a public report that reviews the submitted risk reports, analyzes the climate-related risks facing the states based on the reports and proposes regulatory actions, policies or reforms needed to mitigate those risks.16 The advisory group would also be required to meet regularly with stakeholders on best practices for the disclosure of climate-related financial risks.17 After a hearing on May 20, 2021, the Fiscal Committee did not pass the bill but held it under submission for further work and discussion.18