Climate change is a serious threat to the US housing finance system. That is the conclusion reached by the Federal Housing Finance Agency (“FHFA”) in a December 27th statement. In the statement, Acting FHFA Director Sandra L. Thompson recognizes that Fannie Mae, Freddie Mac, and the Federal Home Loan Banks have an important leadership role in addressing that threat, and the agency is instructing those entities to designate climate change as a priority concern and actively consider its impacts in decision making.
Pursuant to this instruction to treat climate change as a priority, FHFA added resiliency to climate risk as one of its assessment criteria in its 2022 Scorecard for Fannie Mae and Freddie Mac (collectively, the “Enterprises”), and their joint venture Common Securitization Solutions. FHFA developed this scorecard concept in 2012 as a way to evaluate its regulated entities’ governance structure and ensure they are maintaining safety and soundness while meeting their public charter purposes. The scorecard includes specific objectives that communicate FHFA’s priorities and expectations for the Enterprises. By adding a climate change resiliency assessment to the scorecard, FHFA is committing to treat climate change impacts as a priority in its oversight of the housing finance system. Last year, FHFA updated its 2021 Scorecard to include a natural disaster assessment, which required the Enterprises to monitor risks and exposures to their books of business from natural disasters. The FHFA did not include the natural disaster assessment in the new 2022 Scorecard, presumably in lieu of the requirement to ensure each Enterprise is resilient to climate change. Acting Director Thompson’s statement also briefly noted that FHFA is enhancing its agency-wide monitoring and supervision of climate change issues.
The statement is the latest in a series of actions FHFA has taken to address the risks that climate change poses to the US housing finance system. As we detailed in Mayer Brown’s prior Legal Update, the FHFA released a Request for Input (“RFI”) on the issue in January 2021. In addition, as referenced in Acting Director Thompson’s statement, FHFA is a member of the Financial Stability Oversight Council (“FSOC”), which recently reported on and detailed its members’ efforts to manage climate-related financial risk. Acting Director Thompson committed, in the recent statement, to working with other federal agencies through FSOC to address climate change and its impacts.
The Enterprises’ statutory purposes are to provide stability to the secondary mortgage market, provide ongoing assistance to that market, and promote access to mortgage credit, specifically by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing. Because of these purposes, the Enterprises may be more constrained than purely private enterprises, to the extent they are called upon to target their loan purchases in areas with the highest severity of risk of severe climate change (which of course may affect the pricing for those purchases). Moreover, as noted by commenters who responded to FHFA’s RFI earlier in the year, low- and moderate-income borrowers are the most vulnerable to effects from climate change, and to changes in policy and pricing to address climate change. In order to continue fulfilling their statutory purposes, the Enterprises may be caught between minimizing risk of loss due to climate change and not negatively affecting those borrowers.