Fannie Mae and Freddie Mac Can Support Racial Equity in Homeownership and Environmental Justice Efforts

America’s legacy of segregation and racial discrimination—particularly in the area of housing—has made communities of color more vulnerable to the effects of climate change. People of color are more likely than white people to reside in low-income neighborhoods, which have fewer economic and political resources to prepare for and recover from natural disasters and address the risks posed by environmental hazards.¹And while climate change affects all Americans, communities of color are disproportionately exposed and susceptible to environmental hazards and natural disasters compared with affluent and white communities.²

Racial inequalities in homeownership, the racial wealth gap, and racial disparities in climate risks and exposure to environmental hazards require a robust federal policy response to dismantle decadeslong inequities and achieve a just and equitable society. Key to that response are Fannie Mae and Freddie Mac—the government-sponsored enterprises (GSEs)—which own or guarantee more than 60 percent of the nation’s home mortgages, including more than half of single-family home mortgage loans.³ These two organizations are uniquely positioned to reduce the nation’s racial homeownership and wealth gaps while promoting climate and environmental resilience in communities of color.⁴

The GSEs—also known as the enterprises—can close racial housing and wealth gaps and address environmental racism by including climate risk and environmental justice considerations when designating areas that are underserved by mortgage lending and by prioritizing the types of investment activities that reverse decades of environmental racism and promote economic stability, natural disaster risk mitigation, and climate resilience. Following the Biden administration’s recommendations, federal agencies throughout the entire policy spectrum have begun to respond to the challenges of climate change, which are deeply intertwined with racial inequities. Moreover, such inequalities have a substantial geographic component. Therefore, when addressing them, it is critical for policies to explicitly target underserved communities of color to reverse the decadeslong patterns of discriminatory practices and disinvestment.

However, the GSEs find themselves in a serious dilemma. Congress requires them to promote access to mortgage credit in underserved markets, which are typically more vulnerable to climate risks. Meanwhile, the GSEs need to minimize their risk of losses due to climate change without further disadvantaging those communities.⁵ For example, natural disasters that damage or destroy homes with mortgage loans held by the enterprises jeopardize borrowers’ ability to make principal and interest payments on mortgage loans, often leading to an increase in delinquencies, default rates, and loan losses in the enterprises’ books of business. In addition, the risks that climate change poses to the GSEs represent a severe challenge for the securitization of mortgages in low-income communities and communities of color.

Amid an increased awareness of the risks that climate change poses to the nation’s housing finance system, the Federal Housing Finance Agency (FHFA), which oversees the GSEs, recently committed to address climate change to ensure that its regulated entities account for climate-related risks and natural disasters while continuing to fulfill their missions. Such commitment represents a significant step forward to ensure greater access to equitable and sustainable homeownership and to account for the risks associated with climate change and natural disasters. However, these initiatives need to be enhanced through concrete and actionable strategies to boost resiliency to climate change while promoting sustainable homeownership in underserved communities of color.

To ensure the GSEs fulfill their mission to support equitable and sustainable homeownership in underserved communities of color and simultaneously address the growing threat of climate change to the housing market—a threat that disproportionately affects communities of color—the Center for American Progress offers the following policy recommendations:

• Include climate change and environmental justice considerations when setting affordable housing goals, benchmarks, and criteria. The FHFA should collect climate and environmental justice data to assess the risks of climate change and environmental hazards on communities of color. Race, climate, and environmental indicators should be key components when formulating location-based affordable housing goals in order to promote sustainable homeownership in communities of color.
• Reorient market incentives in targeted communities to promote climate resilience and access to affordable housing options in safer areas. The FHFA should prioritize investment activities that reverse decades of environmental racism and promote economic stability, natural disaster risk mitigation, and climate resilience in underserved communities of color. At the same time, the GSEs should ensure that communities of color have access to affordable homeownership in safer areas.
• Promote collaboration and alignment with other agencies. The FHFA should promote and support collaboration and alignment among different agencies’ data collection and distribution, especially regarding the geographic targets set for the affordable housing goals.
• Improve the distribution of climate-related costs and protect borrowers of color. The GSEs should partner with the Federal Housing Administration (FHA) to avoid shifting climate-related costs from the enterprises to the U.S. Department of Housing and Urban Development (HUD). In addition, the FHFA should spread the risk across the enterprises’ entire portfolio rather than price it into individual loans.

The United States is becoming increasingly diverse. Data from the 2020 census reveal that the country’s population of color is rapidly growing, whereas the white population is declining. As demographer William H. Frey puts it, racial and ethnic diversity is taking “different forms in different places.”⁶ While Black people are concentrated in the South and spill into several urban areas in the North and parts of the West, the growing Hispanic population is largely concentrated in the Southwest as well in the Western part of the country. As a result, Hispanic populations routinely share neighborhoods with other nonwhite groups, including Black, Asian and Pacific Islander, and Native American populations. Racial and ethnic diversity is becoming more prevalent everywhere, both in the form of a high representation of one group or,⁷ increasingly, a high representation of two or more nonwhite groups.⁸ (see Figure 1)

Figure 1

Despite the fact that people of color are projected to soon become the majority of the U.S. population, they still lag behind non-Hispanic white people in homeownership and in their ability to accumulate wealth. (see Figure 2)

Figure 2

In addition to the disparities noted above, natural disasters pose unequal risks to communities of color. A report released in late 2021 by the U.S. Environmental Protection Agency (EPA) shows that even though climate change affects all Americans, people of color and low-income people are disproportionately exposed to the highest impacts of climate change, including those associated with extreme temperatures and coastal and inland flooding.⁹ Systemic racism has socially and economically disadvantaged communities of color, making them more susceptible to environmental hazards and natural disasters than white communities.¹⁰ People of color are more likely than white people to reside in low-income neighborhoods that have fewer economic and political resources to prepare for and recover from natural disasters and address the risks that environmental hazards pose to their communities.¹¹ (see Figure 3)

Figure 3

The discriminatory policies and practices of the past played a significant role in the levels of vulnerability to environmental hazards and natural disasters that communities of color experience today. Historical redlining practices,¹² restrictive covenants, slum-clearance projects, and the siting of affordable and subsidized housing have contributed to the concentration of people of color in disinvested neighborhoods that are more likely than other communities to feature outdated housing lacking adequate insulation, flood proofing, off-grid energy, and air conditioning.¹³ A 2021 study conducted by Redfin shows that homes located in formerly redlined areas are more likely to be at high risk of flooding than those located in nonredlined areas.¹⁴ Communities of color are more likely than white communities to reside in low-lying sites that are vulnerable to flooding, such as inland flood risk zones and coastal communities experiencing rising sea levels.¹⁵

As the United States becomes increasingly diverse, natural disasters represent a growing threat to communities of color. The constant overexposure of these communities to environmental hazards and risks makes them even more vulnerable to climate-related natural disasters. Because residential patterns vary greatly by racial and ethnic group—and because some areas face elevated natural risks—some groups face a greater exposure to natural risk than others.¹⁶ These differences, which are quantified in Table 1 and illustrated in Figure 4 through Figure 12, underscore the importance of the targeted policy responses recommended in this report.

Table 1

Of the nearly 2 million Americans residing in close proximity to sites that are vulnerable to flooding, the majority are people of color.¹⁷ However, official counts often underestimate the actual size of vulnerable populations living in the 100-year flood plain or in other areas at high risk of flooding, making preparedness and relief efforts particularly challenging.¹⁸ As Table 1 illustrates, census tracts at very high risk of hydrometeorological natural disasters such as hurricanes, coastal flooding, and riverine flooding are overrepresented by nonwhite racial and ethnic groups. Only 16 percent of non-Hispanic white people reside in such areas, compared with 18 percent of Black people, 19 percent of Hispanic people, and 21 percent of Native Americans. The geographic distribution of areas at high risk of exposure—particularly to hydrometeorological natural disasters—largely overlaps with the racial and ethnic distribution of U.S. residents. (see Figure 1 and Figure 4) Areas along the Gulf of Mexico and coastal Atlantic regions are especially vulnerable to hurricanes and coastal flooding. Black and Hispanic populations concentrated in such areas are particularly exposed to these types of natural disasters. The risk of riverine flooding, on the other hand, is more scattered throughout the country, although large pockets of risk can be found in the Midwest as well as in the Southwest and Pacific regions, particularly where large concentrations of Hispanic, Native American, and communities with a mix of two or more races are highly concentrated.

Figure 4

Cities tend to invest more in flood protection in areas with higher incomes and property values, depriving low-income communities of color of critical flood mitigation.¹⁹ In addition, flood insurance premiums are often unaffordable for low-income homeowners of color, most of whom do not have the financial resources to make home repairs and address the impacts of severe weather events.²⁰ Low-income households own only one-quarter of U.S. homes insured through the National Flood Insurance Program,²¹ a voluntary partnership between local communities and the federal government that is managed by the Federal Emergency Management Agency (FEMA) and allows property owners, renters, and businesses to buy federally backed flood insurance to recover from flood-related disasters.²² A 2019 investigation conducted by NPR indicates that federal aid was often allocated based on cost-benefits analyses that tended to benefit affluent non-Hispanic white communities more than low-income communities and communities of color who needed assistance the most.²³ A related study conducted by Rice University and the University of Pittsburgh shows that after a natural disaster, affluent communities were more likely than low-income ones to receive more aid from FEMA, which has important implications for the perpetuation of wealth inequality.²⁴

Furthermore, a 2021 HUD investigation concerning the Texas General Land Office’s design and operation of the Hurricane Harvey State Mitigation Competition concluded that the state of Texas discriminated based on race and national origin when distributing funds to affected neighborhoods.²⁵ Specifically, Texas steered federal funds toward white affluent areas by utilizing two scoring criteria that substantially disadvantaged Black and Hispanic communities.²⁶ This sort of practice is compounded by exclusions that date back to Jim Crow laws that discriminated against Black people in legal matters in southern states. For example, in the South, more than one-third of Black-owned land is still passed down informally within families, often for generations, in a process known as “heirs’ property.” Without formal deeds, Black landowners are cut off from federal money, including those related to natural disasters.²⁷

The inequitable investments made to improve the climate resilience of structures in coastal cities often trigger climate gentrification and displacement, a process whereby affluent residents of areas at high risk of flooding or exposed to rising sea levels—usually in coastal cities such as Miami and New Orleans—relocate to safer higher ground, often in minority and low-income neighborhoods. This type of relocation spurs higher housing prices and eventually displaces longtime low-income residents.²⁸

People of color also tend to bear the brunt of extreme heat events and other climatological natural disasters.²⁹ Land cover characteristics, limited greenspace, the density of buildings and structures, and heat-retaining construction materials all combine with increasing heat levels to produce what is known as the urban heat island effect—particularly in racially segregated areas.³⁰ According to data reported by the National Oceanic and Atmospheric Administration (NOAA), extreme heat waves represent the most serious weather-related threats to human health.³¹ Evidence shows that in all major urban areas across the nation, the urban heat island effect tends to be worse for people of color than for non-Hispanic white people and contributes to heat-related health disparities.³² Heat waves are particularly common throughout the Southeast and Midwest regions and in large urban areas on the East Coast that are characterized by large concentrations of Black people. (see Figure 5) Indeed, 22 percent of Black people reside in areas at high risk of climatological disasters, most commonly involving heat waves.

Figure 5

Even though extreme heat waves represent the most common and often fatal climatological risk, other types of heat-related disasters are on the rise—including wildfires and droughts—that disproportionately affect communities of color. (see Figure 5) For example, a University of Washington study shows that communities of color and low-income communities are much more vulnerable to wildfires than white neighborhoods.³³ Specifically, nonwhite communities are 50 percentage points more vulnerable to wildfires than white communities.³⁴ Although affluent white people are more likely to reside in close proximity to the areas at greatest risk of wildfires, low-income communities and communities of color are more vulnerable to wildfires for the following reasons:

• They are less likely to be able to afford insurance and any mitigation services, such as tree trimming and brush removal.
• They are more likely to reside in apartment buildings that are harder to escape if exits are congested.
• They are more likely to rent their homes, making them ineligible for the federal assistance that typically helps homeowners rebuild their properties in the event of a wildfire.
• They are less likely to own a private vehicle, and therefore may have more difficulty evacuating the area.
• Non-English speakers may not receive or understand evacuation notifications in time.³⁵

Hispanic, Native American, and Asian American people who are found in large concentrations in the Pacific region and Southwest, as well as the Rocky Mountains region and Florida, are particularly vulnerable to wildfires. Meanwhile, droughts represent a grave threat to Indian Country and rural Hispanic communities.³⁶ Thirty-two percent of Native Americans are highly exposed to severe climatological events, primarily droughts and wildfires. Native American communities are particularly vulnerable due to their lower average income level, as well as their history of forced displacement onto federal reservations, which placed many of these communities in areas at high risk of wildfire.³⁷

Decades of environmental racism and historically unequal exposure to environmental hazards have made communities of color more vulnerable to the risks of natural disasters and hamstrung their ability to respond and adapt to climate change.³⁸ As discussed in a CAP report, “A CRA To Meet the Challenge of Climate Change: Advancing the Fight Against Environmental Racism,” environmental racism is undeniably related to climate change because it determines the communities most likely to suffer from the consequences of activities that cause global warming.³⁹ People of color are more exposed to pollution from all types of sources than white people.⁴⁰ People of color are estimated to have an air pollution index that is 15 points higher than that of white people.⁴¹ Black people, in particular, are disproportionately more exposed than other racial and ethnic groups to large concentrations of ambient fine particulate air pollution (particulate matter 2.5)—the largest environmental cause of mortality.⁴²

Usually, the disproportionate exposure of people of color to air pollution and other pollutants is due to the close proximity of racially segregated neighborhoods to highways, industrial plants, and other sources of pollution.⁴³ Areas with a high exposure to environmental hazards and risks such as air pollution, lead paint, and toxic facilities, among others, largely overlap with areas in which different people of color are overrepresented. (see Figure 6) There are, however, some geographic and racial variations in the exposure to specific types of pollutants. For example, while proximity to toxic sites is scattered throughout the U.S. territory and is particularly high in urban areas, exposure to air pollutants and lead is remarkably high in the Western part of the country, and exposure to respiratory hazards and airborne toxic cancer risks is particularly elevated in the Southeast region. Compared with non-Hispanic white people, virtually all nonwhite racial and ethnic groups are overrepresented in such areas. In particular, 41 percent of Black people, 50 percent of Asian Americans and Pacific Islanders, and 47 percent of Hispanics reside in very close proximity to traffic and toxic sites. Furthermore, more than 50 percent of Hispanics, 46 percent of Asian Americans and Pacific Islanders, and 44 percent of Native Americans are highly exposed to air pollutants and lead. Finally, 23 percent of Black people and 21 percent of Hispanics are highly susceptible to airborne toxic cancer and respiratory hazard risks compared with 10 percent of non-Hispanic white people.

Figure 6

The following sections of this report will discuss the risks that climate-related natural disasters pose to the GSEs and the implications for communities of color, followed by a series of policy recommendations. Specifically, the authors explore how the GSEs could contribute to reducing the racial and ethnic homeownership gap while simultaneously tackling the risks associated with climate change and environmental injustice discussed above.

A trend of worsening hurricanes, wildfires, and floods have resulted in billions of dollars in climate-related property losses, particularly to homes built in areas that are prone to floods, wildfires, and extreme weather.⁴⁴ Floods represent the most frequent and costliest natural disaster in the United States, resulting in billions of dollars of damage every year. Floods are worsening in many areas due to rising sea levels, changing weather patterns, and patterns of development that have placed homes in high-risk areas.⁴⁵ Yet, not all homeowners have flood insurance coverage to protect them against losses from floods. Only about one-third of U.S. households residing in areas of high flood risk are covered by flood insurance.⁴⁶

Major natural disasters can discourage housing activity, such as housing construction and purchases. This can result in the deterioration of housing conditions in both the affected areas and those that are adjacent to them, with rippling negative effects on the volume of mortgage loan originations, home prices, rents, and property values.⁴⁷As property values decrease, the mortgage obligations of homeowners residing in vulnerable areas remain fixed, potentially increasing negative equity rates and foreclosures. Furthermore, the decline of property values has eroded communities’ tax bases and compromised funding for local municipal services and infrastructure.⁴⁸ The result is a vicious cycle that can drastically reduce the ability of communities—especially low-income communities and communities of color—to prepare for and respond to natural disasters and rebuild or relocate in the aftermath of severe weather events. Extreme natural disasters may spur affluent families to move out of disaster-prone areas, leaving behind low-income families who do not have the resources to move away. Ultimately, these trends can decrease family income levels and increase poverty rates in areas hit by severe disasters.⁴⁹

Over the years, the GSEs have purchased and guaranteed a growing portion of mortgages for homes in or adjacent to flood plains despite the significant risk that floods pose to the housing market.⁵⁰As a large portion of home mortgages guaranteed by the GSEs are tied to homes built in flood plains and areas susceptible to natural disasters, climate-related disasters represent a serious concern for the GSEs. Borrowers whose homes are damaged or destroyed by natural disasters may struggle to make principal and interest payments on their mortgage loans, which can lead to more delinquencies,⁵¹ higher default rates, and loan losses in the enterprises’ books of business.

Recent evidence shows that in the aftermath of natural disasters, mortgage lenders—due to a growing awareness of the risk of mortgage defaults posed by climate change-related disasters—are increasingly approving loans that can be sold to the GSEs for homes located in flood zones and other vulnerable areas. Lenders are thus getting these mortgages off their books and transferring climate risk to the enterprises and ultimately to U.S. taxpayers.⁵² This phenomenon is particularly noticeable in areas facing rising sea levels and increased flooding in the Southeast Atlantic and Gulf Coast of the United States.⁵³

CAP analysis of Home Mortgage Disclosure Act data shows that between 2018 and 2020, the GSEs purchased more than half of single-family home loans in areas exposed to different types of natural disasters related to climate change. (see Table 2) In particular, throughout that period, Fannie Mae and Freddie Mac purchased 56 percent of loans tied to single-family properties highly exposed to either coastal flooding or wildfires, and they purchased 54 percent of loans in areas that are highly exposed to drought.

Table 2

The GSEs’ ability to address the risks related to climate change has been constrained in part because they have no regulatory authority over lenders and servicers. According to the U.S. Commodity Futures Trading Commission, the GSEs have insufficient discretion to screen and price mortgages based on climate risk because they are limited by regulations guiding their underwriting activities.⁵⁴ In 2019, for example, the enterprises guaranteed $6.88 trillion in mortgage loans, but they did not price climate risk into their guarantee fees.⁵⁵ GSEs do not charge a premium that reflects climate risk, which may unintentionally encourage residential construction and homebuying in the very areas that are vulnerable to climate-related disasters, including pricey coastal areas.⁵⁶

To mitigate their risks and shift some of the costs of severe floods away from their books of business in the event of unforeseen natural disasters, the GSEs impose flood insurance requirements on lenders and servicers as a condition of purchasing and servicing loans secured by properties located in FEMA-designated special flood hazard areas (SFHAs).⁵⁷ Nevertheless, several climate-induced damages may not be insurable,⁵⁸ and it is usually difficult to assess future flood-related risks because of the increasing unpredictability of major natural disasters. It is challenging to accurately determine which properties may experience losses due to climate change-related severe events in the future. SFHA maps, in particular, are often outdated and do not accurately represent future levels of flood risk.⁵⁹ Flood models developed by the First Street Foundation, a nonprofit research and technology group defining America’s climate risks, indicate that the flood risk across the nation is much greater than indicated by federal government estimates.⁶⁰ First Street Foundation estimates that 14.6 million properties—8.7 million more properties than in government estimates—are at risk of a 100-year flood—one with a 1 percent chance to hit in any given year. FEMA flood plain maps do not reflect risks from all types of floods—including pluvial floods, those caused by extreme rainfall—particularly in urbanized areas with a lack of permeable surfaces.

Properties that are located outside the demarcated 100-year flood zones and are exposed to heavy precipitation tend to represent a substantial portion of flood damage loss.⁶¹ The GSEs hold more than 60 percent of mortgages on homes in areas outside the 100-year flood plain, and fewer homeowners are purchasing federally backed flood insurance.⁶² Ultimately, the enterprises remain responsible for the damaged homes, and taxpayers are left on the hook for mortgage defaults when these homes are severely damaged and homeowners are not current on flood insurance, cannot sustain repair costs, and are forced to abandon their homes.

The risks that climate change poses to the GSEs represent a serious challenge for the securitization of mortgages in low-income communities and communities of color. If the GSEs charged higher fees to guarantee mortgages on homes located in flood plains, they would disproportionally affect low-income communities and communities of color that are particularly vulnerable to the effects of climate change due to decades of systemic environmental racism.⁶³ By charging higher location-based fees, the enterprises would raise the cost of borrowing in underserved communities. In turn, higher borrowing costs and insurance premiums would discourage lending in those communities, depress home prices, and perpetuate decadeslong patterns of disinvestment. The GSEs find themselves in a serious dilemma: Congress requires them to promote access to mortgage credit in underserved markets, which in turn tend to be particularly vulnerable to climate risks. At the same time, the GSEs need to minimize their risk of losses due to climate change without putting underserved communities at a further disadvantage.⁶⁴

Until recently, the GSEs have addressed climate risks predominantly within a disaster response and recovery framework,⁶⁵ rather than proactively encouraging preparedness and resilience in at-risk communities. In 2021, however, the FHFA made a commitment to treat climate change impacts as a priority in its oversight of the GSEs and to ensure that its regulated entities account for climate-related risks and natural disasters while continuing to fulfill their mission to provide stability in the secondary market for residential mortgages and to promote access to mortgage credit in underserved markets.⁶⁶ Among the actions undertaken by the FHFA in the past two years is the addition of resiliency to climate risk as one of the assessment criteria in its 2022 scorecard for Fannie Mae and Freddie Mac.⁶⁷ In addition, the strategic plan for fiscal years 2022–2026⁶⁸ explicitly addresses climate change as one of the main objectives. Specifically, the FHFA states that it will “identify options for incorporating climate change into regulated entity governance.”

To accomplish this mission, the FHFA will:

1. “Conduct research on the risks of climate change on the housing finance system, including research specifically analyzing the risks and effects for underserved populations.”
2. “Build on experiences with natural disaster response to ensure prioritization of climate change at FHFA and the regulated entities.”
3. “Improve climate data collection, analysis, and reporting.”⁶⁹

To complement the initiatives outlined in the strategic plan, the FHFA also directed Fannie Mae and Freddie Mac to draft equitable plans with the explicit goal of promoting equitable access to affordable and sustainable housing by reducing the disparities in racial and ethnic homeownership and reducing underinvestment or undervaluation in formerly redlined areas.⁷⁰

The equitable housing finance plans for 2022–2024 represent a step forward in addressing racial inequalities in access to homeownership. In their plans, Fannie Mae and Freddie Mac recognize the disproportionate risks climate change poses to underserved communities of color. However, similar to the strategic plan, the equitable housing finance plans seem to emphasize the importance of analytics for understating the effects of climate change rather than offering concrete and actionable strategies to enhance resiliency to climate change while promoting sustainable homeownership in underserved communities.⁷¹

The GSEs already have promising tools to better target underserved communities of color to reduce the racial homeownership gap and, at the same time, address environmental injustice and the increasing climate risk in these communities. Because of the geographic nature of racial disparities in homeownership, the racial wealth gap, and the disproportionate vulnerability that communities of color have to environmental hazards and climate-related disasters, the FHFA should direct the GSEs to fine-tune their geographic targeting of communities of color through a revision of the proposed single-family affordable housing goals, as discussed below.

Congress requires the government-sponsored enterprises to promote access to mortgage credit in underserved markets by meeting explicit affordable housing goals.⁷² The affordable housing goals are designed to encourage ongoing assistance to the secondary market for conforming home mortgage loans, in particular those for low- and moderate-income borrowers. The goals are specified in terms of total units financed by GSE purchases in three specific segments of the mortgage market: (see Table 3)

1. Low-income borrowers
2. Very low-income borrowers
3. Borrowers in low-income areas

With the exception of the third goal, which mentions a minority presence in geographically targeted areas, the affordable housing goals have continued to be based predominantly on economic factors. Furthermore, although the third goal explicitly addresses minority status, the goals have never distinguished among the racial and ethnic groups that make up minority neighborhoods.

The designation of affordable housing goals has changed periodically based on the performance and efforts of the GSEs in achieving the targets in previous years.⁷³ In August 2021, the FHFA announced new changes to the current goals to ensure the GSEs responsibly promote equitable access to fair and sustainable mortgage financing that explicitly reaches communities of color and other underserved populations. Specifically, the FHFA has proposed two new single-family home purchase subgoals to replace the existing low-income areas subgoal. One new subgoal targets minority communities; the other continues to target low-income neighborhoods.⁷⁴ (see Table 3)

Table 3

The map in Figure 7 illustrates the distribution of underserved census tracts based on the newly proposed affordable housing goals.

Figure 7

The new designations of location-based underserved markets clearly do a better job including communities of color than older definitions, especially from a geographic perspective. (see Figure 7) The proposed underserved areas, particularly in the minority census tracts subgoal, cover areas characterized by larger percentages of nonwhite racial and ethnic groups than the current underserved areas specified in the current third goal, especially regarding Black and Hispanic people. (see Table 4) Had the proposed new subgoals been effective in the past three years, there would have been a clear improvement in targeting underserved communities of color and disadvantaged communities. For example, had the proposed subgoal one been effective from 2018 to 2020, the GSEs would have purchased loans in census tracts in which 63 percent of the population consists of people of color—a much larger percentage compared with that of underserved census tracts targeted by current goal three. Census tracts targeted by proposed subgoals one and two would have been characterized by lower median household income levels and would have included larger percentages of households with a housing cost burden and people below 200 percent of the federal poverty line.

Table 4

No indicators or considerations related to environmental justice and climate change are currently included in the criteria adopted for the delineation of underserved areas to guide the GSEs in meeting their location-based affordable housing goals—even though climate risks, in the form of high heat and flood risk, are clearly greater in geographically targeted areas. Table 5 illustrates the importance of including climate change and environmental justice in the formulation of the geographically targeted affordable housing goals. Specifically, it shows the percentage distribution of GSE-purchased single-family home mortgage loans across areas that are highly exposed to climate-related natural disasters and environmental risks and hazards in current and proposed targeted underserved communities and in other income-based goals. If the proposed geographic location-based subgoals had been in effect for the past three years, a smaller percentage of loans would have been purchased by the GSEs in areas classified as minority census tracts (subgoal one) and low-income census tracts (subgoal two), which are characterized by a very high exposure to climate-related risks, high expected annual losses, high social vulnerability, and low community resilience. At the same time, the percentage of loans purchased in proposed location-based targets with high exposure to environmental hazards and risks and a high energy burden would have been larger than in current location- and income-based affordable housing goals. While reducing their activities in communities of color at high risk of natural disasters, the GSEs are likely to contribute to the long-standing disproportionate exposure of these communities to environmental hazards.

Table 5

These findings lead to an important policy prescription related to the GSEs’ commitment to reducing the racial homeownership gap while addressing climate and environmental risks in communities of color. When promoting affordable homeownership in communities of color, it is critical that the GSEs not contribute to the already high exposure of these communities to environmental risks and make sure that communities of color at high risk of natural disasters are not left behind.

To boost the FHFA’s capacity to reduce the racial homeownership gap while simultaneously addressing climate change-related risks and systemic environmental racism reflected in the disproportionate vulnerability of communities of color to environmental hazards, CAP offers the following broad recommendations.

Include climate change and environmental justice considerations when setting affordable housing goals, benchmarks, and criteria

The FHFA should collect climate and environmental justice data to assess the risks posed by climate change and environmental hazards to communities of color. Race, climate, and environmental indicators should be a key component when formulating location-based affordable housing goals. Fine-tuning geographic targets would help the GSEs understand what specific activities enhance mitigation, promote equitably managed retreat from at-risk areas, and boost investment and climate resilience where they are needed the most. As this report has discussed, there are important variations in the exposure to climate and environmental risks for nonwhite racial and ethnic groups depending on the areas where they tend to be overrepresented. For example, while some groups are more exposed to hydrometeorological disasters, others are more vulnerable to climatological hazards. Furthermore, while some groups are more exposed to toxic facilities, others are more vulnerable to particulate matter, ozone, and other air pollutants that have deleterious public health consequences. Most importantly, the widespread, disproportionate proximity of communities of color to environmental hazards—due to decades of environmental racism—should be explicitly addressed to achieve environmental justice and make these communities more prepared and resilient in the event of natural disasters. Understanding variations in exposure to specific risks would provide guidance on the types of activities that should be incentivized.

Reorient market incentives in targeted communities to promote climate resilience and access to affordable housing options in safer areas

In addition to targeting communities of color that are vulnerable to climate change and environmental risks, the FHFA should prioritize the types of investment activities that reverse decades of environmental racism and promote economic stability, natural disaster risk mitigation, and climate resilience in underserved communities of color. This effort must be done without placing additional financial burdens on individual homeowners and communities. For instance, the FHFA should incentivize lenders and housing providers to encourage the development of energy-efficient and climate-resilient homes, including through electrification, solar power, and other sources of clean energy that reduce greenhouse gas emissions. Energy-efficient homes at high risk of heat waves would benefit vulnerable communities. In addition, new development and new mortgages in high-risk areas should be limited to reduce exposure to natural disasters, toxic facilities, and other environmental hazards. At the same time, the GSEs should ensure that communities of color have access to affordable homeownership in safer areas. To do so, the GSEs could enhance the availability of affordable homes in low-risk areas by offering incentives and resources, such as discounted rates for homes that are elevated or meet specific building and energy efficiency standards. Promoting the managed retreat of disadvantaged communities of color by steering them to low-risk areas is only possible if affordable and safe homeownership opportunities are available in those areas. At the same time, the GSEs should provide incentives in high-risk areas to foster physical adaptation and better protect homes.

Promote collaboration and alignment with other agencies

The collection of climate data from multiple sources and coordination and consultations with other agencies and stakeholders is of paramount importance for assessing climate risk in communities of color, as well as for stress testing, scenario analysis, and geographic targeting. The FHFA should promote and support collaboration and alignment among different agencies in data collection and distribution, especially regarding the geographic targets defined for the affordable housing goals. The FHFA should align data-collection strategies and climate risk disclosure with the EPA,⁷⁵ FEMA,⁷⁶ NOAA, the U.S. Geological Survey, NASA, the financial regulators overseeing the Community Reinvestment Act,⁷⁷ and the Council on Environmental Quality,⁷⁸ as well as other sources of proprietary data such as the First Street Foundation,⁷⁹ among others.

Improve the distribution of climate-related costs and protect borrowers of color

The GSEs should partner with the FHA to avoid shifting climate-related costs from the enterprises to HUD. For example, if the GSEs purchased the mortgages of borrowers of color in predominantly low-risk areas, a serious risk would arise for the FHA: It would unintentionally force the agency to bear the risks and costs associated with properties located in the more at-risk areas. In addition, the FHFA should spread climate risk across the enterprises’ entire portfolio, rather than price it into individual loans, at the disadvantage of low- and moderate-income borrowers and borrowers of color who would otherwise continue to be priced out of areas at lower climate risk. At the same time, the FHFA should support fair lending and protect consumers from predatory and costly practices, possibly in collaboration with the Consumer Financial Protection Bureau.

Decadeslong inequities in homeownership, the racial wealth gap, and exposure to climate risks and environmental hazards require a robust set of initiatives across the entire policy spectrum to achieve a just and equitable society. The GSEs are in a unique position to reduce the racial homeownership and wealth gaps in the nation while promoting climate resilience and environmental justice in communities of color without creating a modern form of redlining.⁸⁰ They can do so by including climate risk and environmental justice considerations in the designation of underserved communities of color and by prioritizing the types of investment activities that reverse decades of environmental racism, promote economic stability, establish natural disaster risk mitigation, and create climate resilience in these communities.

The author would like to thank Jim Carr, Jason Richardson, Bruce Mitchell, Andres Vinelli, Gregg Gelzinis, Lily Roberts, and Shannon Baker-Branstetter for their review and encouragement, as well as CAP’s Editorial and Art teams for their guidance.