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| Climate Risk In the Housing Market Has Echoes of Subprime Crisis, Study Finds | |
| (about 4 hours later) | |
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| WASHINGTON — Banks are shielding themselves from climate change at taxpayers’ expense by shifting riskier mortgages — such as those in coastal areas — off their books and over to the federal government, new research suggests. | |
| The findings echo the subprime lending crisis of 2008, when unexpected drops in home values cascaded through the economy and triggered recession. One difference this time is that those values would be less likely to rebound, because many of the homes literally would be underwater. | |
| In a paper to be released Monday, the researchers say their findings show “a potential threat to the stability of financial institutions.” They warn that the threat will grow as global warming leads to more frequent and more severe disasters, forcing more loans to go into default as homeowners cannot or would not make mortgage payments. | |
| “We’re talking about a loss that’s going to be borne by United States taxpayers,” said Amine Ouazad, a professor in the department of applied economics at HEC Montreal and one of the paper’s authors. He added that with between $60 billion to $100 billion in new mortgages issued for coastal homes each year, “we’re not talking about a small number.” | “We’re talking about a loss that’s going to be borne by United States taxpayers,” said Amine Ouazad, a professor in the department of applied economics at HEC Montreal and one of the paper’s authors. He added that with between $60 billion to $100 billion in new mortgages issued for coastal homes each year, “we’re not talking about a small number.” |
| Mr. Ouazad, along with his co-author Matthew Kahn, a professor at Johns Hopkins University, examined the behavior of mortgage lenders in areas hit by hurricanes between 2004 and 2012, each of which caused at least $1 billion in damages. They found that, after those hurricanes, lenders increased by almost 10 percent the share of those mortgages that they sold to Fannie Mae and Freddie Mac, government-sponsored enterprises whose debts are backed by taxpayers. | Mr. Ouazad, along with his co-author Matthew Kahn, a professor at Johns Hopkins University, examined the behavior of mortgage lenders in areas hit by hurricanes between 2004 and 2012, each of which caused at least $1 billion in damages. They found that, after those hurricanes, lenders increased by almost 10 percent the share of those mortgages that they sold to Fannie Mae and Freddie Mac, government-sponsored enterprises whose debts are backed by taxpayers. |
| Selling mortgages to Fannie and Freddie allows banks to avoid the financial risk that homeowners will default on the mortgages. Hurricanes increase that risk: Mr. Ouazad and Mr. Kahn found that the odds of an eventual foreclosure rise by 3.6 percentage points for a mortgage originated in the first year after a hurricane, and by 4.9 percentage points for a mortgage originated in the third year. | Selling mortgages to Fannie and Freddie allows banks to avoid the financial risk that homeowners will default on the mortgages. Hurricanes increase that risk: Mr. Ouazad and Mr. Kahn found that the odds of an eventual foreclosure rise by 3.6 percentage points for a mortgage originated in the first year after a hurricane, and by 4.9 percentage points for a mortgage originated in the third year. |
| The regulations governing Fannie and Freddie do not let them factor the added risk from natural disasters into their pricing, which means banks and other lenders can offload mortgages in vulnerable areas without financial penalty. That increases the incentive for banks to make the loans and then move them off their books, the authors said. | The regulations governing Fannie and Freddie do not let them factor the added risk from natural disasters into their pricing, which means banks and other lenders can offload mortgages in vulnerable areas without financial penalty. That increases the incentive for banks to make the loans and then move them off their books, the authors said. |
| Fannie Mae and Freddie Mac are private companies created by the government to support mortgage and housing markets. After suffering massive losses during the 2008 financial crisis, the federal government essentially began to back their debts. The Trump administration has proposed shifting their role to the private sector, though no legislation appears imminent. | Fannie Mae and Freddie Mac are private companies created by the government to support mortgage and housing markets. After suffering massive losses during the 2008 financial crisis, the federal government essentially began to back their debts. The Trump administration has proposed shifting their role to the private sector, though no legislation appears imminent. |
| Mr. Ouazad said he and Mr. Kahn looked at data for thousands of lenders, and their findings reflect the average of those lenders’ behavior after hurricanes. He declined to share the findings about any specific lender, while saying that the increase in securitization was greater for national banks. | Mr. Ouazad said he and Mr. Kahn looked at data for thousands of lenders, and their findings reflect the average of those lenders’ behavior after hurricanes. He declined to share the findings about any specific lender, while saying that the increase in securitization was greater for national banks. |
| When asked about the findings, representatives of JP Morgan Chase and Wells Fargo, two of the country’s largest mortgage lenders, denied engaging in the practice described in the paper. Quicken Loans and Bank of America did not respond to questions. | When asked about the findings, representatives of JP Morgan Chase and Wells Fargo, two of the country’s largest mortgage lenders, denied engaging in the practice described in the paper. Quicken Loans and Bank of America did not respond to questions. |
| The Mortgage Bankers Association, which represents mortgage lenders, declined to comment. The Federal Housing Finance Agency, which sets the rules governing the behavior of Fannie and Freddie, did not respond to a request for comment. | The Mortgage Bankers Association, which represents mortgage lenders, declined to comment. The Federal Housing Finance Agency, which sets the rules governing the behavior of Fannie and Freddie, did not respond to a request for comment. |
| Fannie Mae and Freddie Mac declined to comment on the paper or to describe what share of the mortgages they hold are for homes in flood zones. | Fannie Mae and Freddie Mac declined to comment on the paper or to describe what share of the mortgages they hold are for homes in flood zones. |
| Housing economists who were not involved in the research said that the methodology used by Mr. Ouazad and Mr. Kahn was sound, and that their findings would raise troubling questions about who will bear the financial cost of climate change in the United States. | Housing economists who were not involved in the research said that the methodology used by Mr. Ouazad and Mr. Kahn was sound, and that their findings would raise troubling questions about who will bear the financial cost of climate change in the United States. |
| “The problem they’ve discovered is likely to grow in magnitude and is clearly important, because the taxpayer is on the hook,” Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, said. The mortgage market’s exposure to flooding “could be as large as the losses due to the subprime crisis,” Ms. Wachter said, referring to the 2008 housing crisis, which threw the nation into its worst economic downturn since the 1930s. | “The problem they’ve discovered is likely to grow in magnitude and is clearly important, because the taxpayer is on the hook,” Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, said. The mortgage market’s exposure to flooding “could be as large as the losses due to the subprime crisis,” Ms. Wachter said, referring to the 2008 housing crisis, which threw the nation into its worst economic downturn since the 1930s. |
| The paper’s findings suggest that banks and other lenders are aware of that threat, she added. “They see this coming,” Ms. Wachter said. “And they’re taking steps to shift the risk.” | The paper’s findings suggest that banks and other lenders are aware of that threat, she added. “They see this coming,” Ms. Wachter said. “And they’re taking steps to shift the risk.” |
| Asaf Bernstein, an economist at the University of Colorado in Boulder, said the findings highlighted another problem: By agreeing to buy mortgages for homes at risk from climate change, without charging a premium that reflects that risk, the federal government had effectively encouraged home construction and purchases in vulnerable areas. | Asaf Bernstein, an economist at the University of Colorado in Boulder, said the findings highlighted another problem: By agreeing to buy mortgages for homes at risk from climate change, without charging a premium that reflects that risk, the federal government had effectively encouraged home construction and purchases in vulnerable areas. |
| “It’s basically an implicit subsidy,” Mr. Bernstein, who was not involved in the study, said. | “It’s basically an implicit subsidy,” Mr. Bernstein, who was not involved in the study, said. |
| Economists at both Fannie and Freddie have warned in the past of the risks that climate-related increases in flooding pose to the mortgage industry. In 2016, Sean Becketti, then the chief economist at Freddie Mac, wrote that rising seas “appear likely to destroy billions of dollars in property.” | Economists at both Fannie and Freddie have warned in the past of the risks that climate-related increases in flooding pose to the mortgage industry. In 2016, Sean Becketti, then the chief economist at Freddie Mac, wrote that rising seas “appear likely to destroy billions of dollars in property.” |
| “The economic losses and social disruption may happen gradually, but they are likely to be greater in total than those experienced in the housing crisis and Great Recession,” he wrote. “It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater.” | “The economic losses and social disruption may happen gradually, but they are likely to be greater in total than those experienced in the housing crisis and Great Recession,” he wrote. “It is less likely that borrowers will continue to make mortgage payments if their homes are literally underwater.” |
| Last year, Michael LaCour-Little, an economist at Fannie Mae, co-wrote a paper stating that while coastal flooding is likely to inundate a relatively small share of homes in the United States, the effects on home default rates could be felt much more widely. | Last year, Michael LaCour-Little, an economist at Fannie Mae, co-wrote a paper stating that while coastal flooding is likely to inundate a relatively small share of homes in the United States, the effects on home default rates could be felt much more widely. |
| “An increase in the vacancy rates, neighborhood blight and lack of amenities will exacerbate the decline in property values,” Mr. LaCour-Little and his co-authors wrote. Borrowers in these areas “may face both the inability to repay their mortgage, and the inability to recoup enough funds when selling their house to cover the unpaid mortgage principle.” | “An increase in the vacancy rates, neighborhood blight and lack of amenities will exacerbate the decline in property values,” Mr. LaCour-Little and his co-authors wrote. Borrowers in these areas “may face both the inability to repay their mortgage, and the inability to recoup enough funds when selling their house to cover the unpaid mortgage principle.” |
| Mr. Ouazad said he hopes the new research opens a discussion about who bears the risks of climate change and about lending policies in danger zones. “Do we still want to have 30-year fixed mortgages in areas at risk of flooding?” Mr. Ouazad asked. “I’m not sure about that.” | Mr. Ouazad said he hopes the new research opens a discussion about who bears the risks of climate change and about lending policies in danger zones. “Do we still want to have 30-year fixed mortgages in areas at risk of flooding?” Mr. Ouazad asked. “I’m not sure about that.” |
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| Neil Irwin contributed reporting from Washington. | Neil Irwin contributed reporting from Washington. |