He assesses climate risk on the housing market, and he wants your attention
He assesses climate risk on the housing market, and he wants your attention
Nearly half of all homes in the United States are at risk of “severe or extreme” damage from events like flooding, high winds and wildfire, Realtor.com estimates. And rising insurance costs — in part because of those risks — are making homeownership less affordable in many parts of the country.
As chief climate officer at Fannie Mae, the government-sponsored mortgage finance company, Tim Judge assesses how climate change may affect housing and Fannie Mae’s huge mortgage portfolio.
Judge joined “Marketplace” host Amy Scott to discuss insurance premiums, climate risk and housing affordability. An edited transcript of their conversation follows.
Amy Scott: What does it mean to be the chief climate officer at Fannie Mae? What’s your role there?
Tim Judge: Well, it means I’m responsible for understanding the impact of climate on Fannie Mae now and in the future, as well as working on strategies to address the risk of climate to U.S. housing. So that means working with internal stakeholders as well as external stakeholders on opportunities to mitigate and to promote and help the transition to a greener economy.
Scott: What kind of risk do you see for Fannie Mae, coming from not just, you know, the increase in severe weather, but the insurance challenges that are happening partly as a result of that?
Judge: So climate change is certainly going to have a large impact on U.S. housing. I think what we’re seeing in the insurance space is a clear indication of that, and insurance is now a kitchen-table topic for most people in the United States. When we look at insurance, one of the things we do is our national housing survey. We asked a lot of consumers about insurance. Two-thirds of them said their premiums have been impacted by the natural disaster events or some other damage to their property due to climate-related events.
Scott: Wow.
Judge: So we continue to look at that. And I think what we’ve seen in our book, Amy, is we still see that overall, insurance is affordable. Overall, homeowners insurance is available. But that doesn’t mean that there aren’t pockets in the United States that are seeing some of those big challenges.
Scott: Tell me about some of those pockets. I think a lot of people are familiar with the issues in Florida on the coast, Louisiana, also in California and wildfire country, but it seems that the issue is growing and becoming something that we’re seeing in more parts of the country.
Judge: Yeah, as you said, Louisiana, California and Florida have always been the leading discussion points. It is in the Midwest becoming a bigger issue, and it’s largely driven by what you’ve seen in the last couple of years in terms of severe convective storms in the Midwest. Last year, there were 18 to 20 severe convective storms that cost over a billion dollars. That has to be reflected in insurance premiums going forward. And so I think some of those new places are really where you’re starting to hear new headlines about it is going to impact Midwest, where insurance wasn’t as much of an issue previously.
Scott: So as you know, some people think that the market is in for a correction in places that may be overvalued, because climate risk hasn’t really been priced in. And as insurance gets more expensive, we might see more of those properties losing value as more people have to sell or people are less inclined to buy. What kind of risk does that pose to Fannie Mae and therefore the taxpayer?
Judge: So insurance rates have jumped due to a number of things. Inflation is a clear driver of insurance premiums across the United States. There are litigation issues, as we know, down in Florida, with lawsuits. You mentioned California, where there’s been some regulatory challenges that have driven kind of availability issues. But the last part of that is certainly climate risk. So we have not seen big impacts to valuation due to climate change, and there are a couple of reasons, one of which is we still have a huge issue with housing supply in the United States. We have too few properties relative to the demand. So that signal somewhat outweighs, quite honestly, the climate signal at this point.
Scott: So some have said that Fannie Mae and Freddie Mac are really subsidizing homeownership in risky areas, because it costs the same to get a mortgage on the coast as it does to get one further inland. Have you considered some kind of risk premium or pricing that would send that signal so that people aren’t, you know, easily able to live, and, in fact, continue living and rebuilding in risky areas?
Judge: There are a couple answers to that. The first is, I don’t think the analytics are at a level today to make those kind of property-level distinctions. We continue to work on this. As the head of modeling and the chief climate officer at Fannie Mae, I have a responsibility to ensure that the metrics make sense at a property level, and I just don’t think we’ve matured to that level yet. And I do think the question of taking properties or taking areas off the list probably misses the point of we should really be thinking about which areas we need to invest more in terms of resiliency. As you said, we have a housing supply issue. The last thing I want is to have lower supply of housing. And in many of these communities that are at risk, you know, resilient investment in either the community or at the property level would make those properties still completely sustainable and safe.
Scott: Let’s talk a little more about disclosure, because it’s kind of striking that there aren’t requirements in many communities for a seller to inform a buyer that the house has flooded in the past, for example. Is that something that Fannie Mae could mandate for the mortgages it purchases?
Judge: We do need every state to have flood disclosures. Where it rains, it can flood, right? And we have seen a lot of progress lately, Vermont being the latest state that has just come out with flood disclosures. But I do think, you know, whether it’s Fannie working with the Federal Housing Finance Agency, or the Federal Emergency Management Agency, or any state bodies working together, is we do need to make sure consumers are more aware. One of the reasons why we focus so much on awareness is if you get people to be aware and you move it into their day-to-day lives, then we’ll slowly acclimate to the climate being part of our risk assessment on housing, and it’ll be slowly letting that air out of the balloon. If we go 20 or 30 years without taking real climate action, then I think you have built up a real challenge. And so what our real opportunity here is, is to make sure we transition as quickly as possible, and so we don’t even have to think about those risks 20 or 30 years down the line.
Scott: Yeah, here’s hoping.
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