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FHFA ponders climate risk for Fannie and Freddie

FHFA opens the floor to commentary on how natural disasters may effect the GSE's financial stability

The Federal Housing Finance Agency (FHFA) announced Tuesday that it is requesting input on the current and future risk of natural disasters and climate change on Fannie Mae and Freddie Mac, especially as it relates to the housing financial system overall.

The Request for Input (RFI) – available for comments until Apr. 19, 2021 – opens the floor on 26 different questions that decipher how the FHFA should define climate and natural disaster risk, the risk management strategies the FHFA should deploy and prioritization among other variables the organization is considering.

“Natural disasters can adversely affect the regulated entities. Historically, the ability to assess the scale, timing, location, and impact of such risks has been limited. Today’s RFI will help FHFA better understand and address the regulated entities’ exposure to climate and natural disaster risk,” said Director Mark Calabria.

Fannie Mae’s 2019 Annual Report of Form 10-K notes the occurrence of a major natural or environmental disaster, terrorist attack, cyber-attack, pandemic or similar event could have a negative impact on its credit losses and credit-related expenses. Whether those events are local or national is also a factor.

“Recent years have seen frequent and severe natural disasters in the U.S., including hurricanes, wildfires and floods. There are concerns that the frequency and severity of major weather-related events is indicative of changing weather patterns and that these patterns could persist or intensify,” the report said.

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“As a result, any continuation or increase in recent weather trends or their unpredictability, or any single natural disaster of significant scope or severity, could have a material impact on our results of operations and financial condition,” the report added.

In September, the climate-related subcommittee for the U.S. Commodity Futures Trading Commission released a report detailing the risks associated with America’s financial system and climate change. In it, the CFTC noted that because Fannie and Freddie are limited by rules governing how they underwrite mortgages, they may have limited room to screen for and manage climate risk.

The CFTC also said the GSEs are “government shock absorbers” – entities that hold assets during financial disturbances. Because of their shock-absorbing nature, the CFTC encouraged ensuring that the GSEs are effectively monitoring climate risk to enhance the stability of the U.S. mortgage market.

On the cusp of the pandemic in April, the FHFA altered the MBS buyback policy that would then treat loans with COVID-19 forbearance payments the same as a natural disaster event. In a statement, the FHFA said that both it and the GSEs will continue to monitor the impact of the coronavirus national emergency on the housing finance market and will update their policies “as necessary.”

Under the latest RFI, the FHFA invites interested parties to submit any studies, research, data or other information relevant to the regulated entities’ climate and natural disaster risk.

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