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Time to be Realistic About Climate Change

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It’s Time for Lenders to be Realistic About Climate Change Risks

By: Adam M. Matheny

Sea Levels Will Rise and Damage Will Happen

Climate change is a topic on everyone’s mind, but one of the issues that has been overlooked by far too many homebuyers is how it will affect real estate. As the oceans rise, shore side properties can find themselves prone to flooding and damage from surging storms. It’s difficult for a layperson to accurately assess these risks, and many underestimate them, leading them to overpay for properties which represent much more risk than they comprehend.

These risks aren’t borne only by homebuyers. Mortgage lenders will feel the crunch as well, which will affect the economy, and eventually, all American taxpayers.

The majority of real estate is purchased through long-term mortgages. For example, a $500,000 home may be purchased by a buyer who arranges a $450,000 mortgage which they intend to pay back over the course of thirty years.

Climate and Economic Crisis.. Yikes

This is all well and good, but what if that property is in an area that will be adversely affected by the changing climate? What if, prior to paying off that loan, the buyer finds their home underwater or flattened by hurricane winds? Or perhaps, consumed by a wildfire? Even insurance payments are often not enough to recover from disasters of the magnitude that climate change scientists are warning us about. When homeowners can’t rebuild or recover, they all too often default on their loans.

With properties along America’s coasts representing up to $100 billion in mortgages, we could be looking at more than a climate crisis. It could be an economic crisis, as well. Lenders can mitigate their own risks by selling these mortgages to the government backed enterprises Freddie Mac and Fannie Mae, but that doesn’t change the fact that taxpayers will feel the effects of climate change on the real estate market. Such a crisis could make the 2008 crisis look mild in comparison.

To understand just how bad it could be, consider the aftereffects of Hurricane Katrina and Superstorm Sandy. Declining interest in (and availability of) flood insurance resulted in far more defaults, foreclosures, and delinquencies in these areas; Hurricane Katrina resulted in a $119 billion loss and Sandy in a $73 billion loss. And naturally, fewer homes will be built in these areas in the future, as they are likely to be flooded again—and worse.

American Tax Payers are the Bail Out

It’s not surprising lenders in these areas are more likely to transfer their loans to government backed mortgage services, especially if these areas have not historically been prone to flooding. In essence, this practice puts the greatest portion of the financial risk on America’s taxpayers, which is why many are calling for reforms that prevent lenders from becoming dependent on the government enterprises to bail them out.  Others call for higher securitization fees (the fees the government charges lenders when taking on these mortgages), especially if the property is high risk. Finally, the entire industry needs to be more cognizant of the risks inherent in coastal properties, and more informed about the various scenarios that climate change may bring.

Climate change risks are growing by the day, and they will affect every area of our lives, from what we eat to where we live. It’s critical that organizations with the resources to do so—like mortgage lenders—own their responsibility to understand the risks climate change poses.

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