As fires and floods become a reality for many Americans with Fannie Mae and Freddie Mac mortgages, homes in areas subject to natural disasters are seeing a drastic loss in value, the New York Times reports.
A report from February of 2023 estimated that homes in flood areas have been overpriced by a minimum of $187 billion in some counties in Appalachia and coastal Louisiana, amounting to more than 10% of the total property value.
In 2023, the Congressional Budget Office found that those properties covered by federally back mortgages could sustain close to $190 billion in flood damages over the next 30 years, not counting the dangers of wildfire or drought.
While lenders are taking greater care in offering credit to areas that might flood and homeowners have responded to flood disclosure risks on property websites, Fannie and Freddie do not take such risk into account when underwriting loans. The two entities have typically relied on insurance to deal with climate risk management as flood coverage is required in special flood hazard areas.
Susan Crawford, a senior fellow at the Carnegie Endowment for International Peace, said Fannie and Freddie need to adjust their lending practices according.
"This is all about the safety and soundness of the enterprises," Crawford said. "We've got this mortgage-generating machine that is just moving blindly on without taking into account these risks."
Yet loaning based on climate risk comes with an additional social risk as well. Many of the areas in flood and fire zones are also populated by lower-income homeowners of color. Raising mortgages fees to compensate for climate could hurt at risk borrowers.
"When you start doing things on a geographic-area basis, that starts to feel a little bit like redlining," said Michael LaCour-Little, who was senior director of economics at Fannie Mae from 2016 to 2023. "The charters suggest that Fannie and Freddie should be there to create a liquid market under all circumstances at all times."