Altering mortgages to account for climate change threats

A new Federal Reserve report considers how the consequences of climate change might affect mortgages:

The housing market doesn’t yet factor in the risk of climate change, which is already affecting many areas of the U.S., including flood-prone coastal communities, agricultural regions and parts of the country vulnerable to wildfires. In California, for instance, 50,000 homeowners can’t get property or casualty insurance because of the increased risk to their homes.

Yet for now, no mortgage lender, portfolio manager or buyer of mortgages takes into account climate-induced floods, except to determine if a house sits in a 100-year floodplain at the time the mortgage is issued, said Michael Berman, a former official with the U.S. Department of Housing and Urban Development and former chairman of the Mortgage Bankers Association.

Once lenders and housing investors do start pricing in such risks, “There may be a threat to the availability of the 30-year mortgage in various vulnerable and highly exposed areas,” Berman wrote in a recent San Francisco Fed report. He predicts lenders could “blue-line” entire regions where flood risks are high — a reference to redlining, the practice of refusing mortgages to minorities…

Said Cleetus: “My biggest fear, honestly, is that the markets will get out ahead of our policies, and we see a situation where property values do start to decline, and small communities that rely on a lot of property tax revenue won’t be able to deal with it.”

It will be interesting to see who (1) pursues this as a competitive advantage and (2) how federal policy plays into this. In a quest to get ahead of the rest of the market, could someone come up with a unique mortgage for areas with more climate change risk? Discussions about whether federal money should be used in places prone to natural disasters has been going for decades (see Hurricane Sandy or discussions about resilient cities).

Much of the article focuses on how the lack of mortgages in certain areas would lead to decreased property values and then a downward spirals as communities would not be able to generate as much tax revenue. This could also work the other way: imagine communities where only the really wealthy can live because they do not need traditional mortgages. They could come in and gobble up real estate with lowered values. Either way, the result could be increased inequality in affected areas.

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