Fannie Mae and Freddie Mac Can Support Racial Equity in Homeownership and Environmental Justice Efforts
Fannie Mae and Freddie Mac Can Support Racial Equity in Homeownership and Environmental Justice Efforts
The government-sponsored enterprises are in a unique position to reduce the racial homeownership gap while simultaneously addressing climate change-related risks and systemic environmental racism.
In this article
Introduction and summary
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.
Communities of color are on the front lines of climate and environmental risks
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)
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)
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)
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.
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.
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.
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.
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.
The risks natural disasters pose to the GSEs and implications for communities of color
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.
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:
- “Conduct research on the risks of climate change on the housing finance system, including research specifically analyzing the risks and effects for underserved populations.”
- “Build on experiences with natural disaster response to ensure prioritization of climate change at FHFA and the regulated entities.”
- “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.
The enterprises’ affordable housing goals
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)
- Low-income borrowers
- Very low-income borrowers
- 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)
The map in Figure 7 illustrates the distribution of underserved census tracts based on the newly proposed affordable housing goals.
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.
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.
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.
- U.S. Environmental Protection Agency, “Climate Change and Social Vulnerability in the United States: A Focus on Six Impacts” (Washington: 2021), available at https://www.epa.gov/system/files/documents/2021-09/climate-vulnerability_september-2021_508.pdf. The report indicates that Black people face higher levels of all impacts analyzed in the study compared with all other demographic groups. See also National Equity Atlas, “Neighborhood poverty: All neighborhoods should be communities of opportunity,” available at https://nationalequityatlas.org/indicators/Neighborhood_poverty#/ (last accessed June 2022).
- Ian P. Davies and others, “The unequal vulnerability of communities of color to wildfire,” PLOS ONE 13 (11) (2018): 1–15, available at https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0205825.
- Federal Housing Finance Agency, “What Types of Mortgages Do Fannie Mae and Freddie Mac Acquire?”, April 14, 2021, available at https://www.fhfa.gov/Media/Blog/Pages/What-Types-of-Mortgages-Do-Fannie-Mae-and-Freddie-Mac-Acquire.aspx.
- The GSEs are privately owned, federally chartered entities that purchase residential home mortgages from primary-market lenders and package most of the purchased loans into securities to be sold to private investors with a guarantee of full payment of principal and interest. While the Federal Home Mortgage Banks are also considered GSEs, Fannie Mae and Freddie Mac are the only two mortgage-based GSEs that securitize mortgage loans.
- Laurence E. Platt, Kris D. Kully, and Kerri Webb, “FHFA Releases Statement on Climate Change,” Mayer Brown, December 31, 2021, available at https://www.cfsreview.com/2021/12/fhfa-releases-statement-on-climate-change/.
- William H. Frey, “Mapping America’s diversity with the 2020 census” (Washington: The Brookings Institution, 2021), available at https://www.brookings.edu/research/mapping-americas-diversity-with-the-2020-census/#:~:text=When%20it%20comes%20to%20nonwhite%20racial%20and%20ethnic,American%20residents%20are%2012.1%25%20and%206.1%25%2C%20respectively.%20.
- Consistent with William H. Frey, “Mapping America’s diversity with the 2020 census,” this analysis shows that a racial/ethnic group is highly represented if its share of the area (census tract) population is larger than its share of the national population.
- Ibid. About one-third of the U.S. population resides in counties where two or more nonwhite groups are highly represented.
- U.S. Environmental Protection Agency, “Climate Change and Social Vulnerability in the United States: A Focus on Six Impacts.”
- Davies and others, “The unequal vulnerability of communities of color to wildfire.”
- It is important to note that aggregated figures for the Asian population do not reflect the socioeconomic heterogeneity of this group. Disaggregated 2016–2020 data of the Asian population by selected groups indicate that the share of the nation’s Indian, Japanese, Korean, and Taiwanese populations residing in low-income census tracts are much smaller than the share of other Asian groups, such as the nation’s Vietnamese, Hmong, and Cambodian populations, among other groups that typically feature lower income levels and tend to be concentrated in low-income census tracts. See, for example, Abbigail Hull, “2020 United States Census Data Highlights Diverse, Growing Asian American Population,” Asia Matters For America, September 10, 2021, available at https://asiamattersforamerica.org/articles/2020-united-states-census-data-highlights-diverse-growing-asian-american-population.
- The Home Owners’ Loan Corporation institutionalized redlining during the 1930s as a way to evaluate the quality of neighborhoods based on their racial and ethnic makeup. Neighborhoods with a large population of African Americans and other people of color typically received the lowest ratings and were deemed too risky to secure government-backed mortgages. Investment money was consistently deflected away from central cities where people of color were concentrated. Douglas S. Massey and Nancy A. Denton, American Apartheid (Cambridge, MA: Harvard University Press, 1998); Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States (Oxford, United Kingdom: Oxford University Press, 1985); Richard Rothstein, The Color of Law (New York: Liveright Publishing Corporation, 2017).
- Jasmine Bell, “5 Things to Know About Communities of Color and Environmental Justice,” Center for American Progress, April 25, 2016, available at https://www.americanprogress.org/article/5-things-to-know-about-communities-of-color-and-environmental-justice/. Low-cost rental housing is particularly vulnerable to natural disasters. See Jee Young Lee and Shannon Van Zandt, “Housing Tenure and Social Vulnerability to Disasters: A Review of the Evidence,” Journal of Planning Literature 34 (2) (2018): 156–170, available at https://journals.sagepub.com/doi/abs/10.1177/0885412218812080?journalCode=jplb0&; Climate Central, “Struggling Against a Rising Tide: Sea level rise and coastal flooding threaten affordable housing,” Climate Central, 2020, available at https://assets.ctfassets.net/cxgxgstp8r5d/2nitlFrqBONFS2R44J7SLY/5c0c724f1d001be26c72cac05d859e1b/SEA_LEVEL_RISE_AND_COASTAL_FLOODING_THREATEN_AFFORDABLE_HOUSING.pdf.
- Lily Katz, “A Racist Past, a Flooded Future: Formerly Redlined Areas Have $107 Billion Worth of Homes Facing High Flood Risk—25% More Than Non-Redlined Areas,” Redfin, March 14, 2021, available at https://www.redfin.com/news/redlining-flood-risk/. The findings are based on the analysis of flood risk by redlining grade in 38 major U.S. metropolitan areas.
- Jessica Villalón, “Flooding Disproportionately Impacts People of Color,” Bayou City Waterkeeper, September 18, 2020, available at https://bayoucitywaterkeeper.org/flooding-disproportionately-impacts-people-of-color/.
- The analysis presented in the report follows a methodology that is consistent with that utilized in the Climate and Economic Justice Screening Tool with regards to thresholds. See Climate and Economic Justice Screening Tool, “Explore the map,” available at https://screeningtool.geoplatform.gov/en/#3/33.47/-97.5 (last accessed June 2022). Indicators used in the present analysis consist of percentiles, which help to address the fact that several variables are measured in different units and on different scales. As in the Climate and Economic Justice Screening Tool, this analysis adopts the 90th percentile as the cutoff value for environment and climate indicators to identify high-risk areas.
- Natalie Colarossi, “10 egregious examples of environmental racism in the US,” Insider, August 11, 2020, available at https://www.insider.com/environmental-racism-examples-united-states-2020-8.
- Oliver E.J. Wing and others, “Estimates of present and future flood risk in the conterminous United States,” Environmental Research Letters (13) (2018), available at https://iopscience.iop.org/article/10.1088/1748-9326/aaac65/pdf.
- Christopher Flavelle and others, “New Data Reveals Hidden Flood Risk Across America,” The New York Times, June 29, 2020, available at https://www.nytimes.com/interactive/2020/06/29/climate/hidden-flood-risk-maps.html.
- Carolyn Kousky and Helen Wiley, “Improving the Post-Flood Financial Resilience of Lower-Income Households through Insurance” (Philadelphia: Wharton School Press, 2021), available at https://riskcenter.wharton.upenn.edu/wp-content/uploads/2022/04/Improving-LMI-Household-Flood-Insurance-Options_Issue-Brief.pdf.
- Amal Ahmed, “In Houston’s Fifth Ward, The Storm Never Stops,” Texas Observer, July 17, 2020, available at https://www.texasobserver.org/in-houstons-fifth-ward-the-storm-never-stops/?utm_source=mc&utm_medium=newsletter&utm_campaign=july_18_2020&goal=0_975e2d1fa1-3026a87782-34566915&mc_cid=3026a87782&mc_eid=2b96968027.
- Federal Emergency Management Agency, “Flood Insurance,” available at https://www.fema.gov/flood-insurance (last accessed June 2022).
- Rebecca Hersher and Robert Benincasa, “How Federal Disaster Money Favors the Rich,” NPR, March 5 2019, available at https://www.npr.org/2019/03/05/688786177/how-federal-disaster-money-favors-the-rich.
- Junia Howell and James R. Elliott, “Damages Done: The Longitudinal Impacts of Natural Hazards on Wealth Inequality in the United States,” Social Problems 66 (3) (2019): 448–467, available at https://academic.oup.com/socpro/article/66/3/448/5074453; Chrishelle Palay, “Disaster Aid Perpetuates Inequality,” Shelterforce, May 13, 2019, available at https://shelterforce.org/2019/05/13/disaster-aid-perpetuates-inequality/?utm_source=sfweekly&utm_medium=email&utm_campaign=090621.
- Tracy Jan, “Black communities are last in line for disaster planning in Texas,” The Washington Post, May 12, 2022, available at https://www.washingtonpost.com/business/interactive/2022/hud-texas-disaster-discrimination/.
- Region VI Director Christina Lewis, “Re: Letter Finding Noncompliance with the Title VI and Section 109,” Office of Fair Housing and Equal Opportunity, March 4, 2022, available at https://texashousers.org/wp-content/uploads/2022/03/HUD-Letter-Finding-Noncompliance-with-Title-VI-and-Section-109-.pdf?itid=lk_inline_enhanced-template.
- Hannah Dreier and Andrew Ba Tran, “‘The real damage’: Why FEMA is denying disaster aid to Black families that have lived for generations in the Deep South,” The Washington Post, July 11, 2021, available at https://www.washingtonpost.com/nation/2021/07/11/fema-black-owned-property/.
- Casey Tolan, “High ground, high prices: How climate change is speeding gentrification in some of America’s most flooding-vulnerable cities,” CNN, March 3, 2021, available at https://www.cnn.com/interactive/2021/03/us/climate-gentrification-cnnphotos-invs/; Shelia Hu, “What Is Climate Gentrification?”, Natural Resources Defense Council, August 27, 2020, available at https://www.nrdc.org/stories/what-climate-gentrification. See also Jeff Ueland and Barney Warf, “Racialized Topographies: Altitude and Race in Southern Cities,” Geographical Review 96 (1) (2006): 50–78, https://www.jstor.org/stable/30034004?seq=1; Justin Dorazio, “Localized Anti-Displacement Policies: Ways To Combat the Effects of Gentrification and Lack of Affordable Housing” (Washington: Center for American Progress, 2022), available at https://www.americanprogress.org/article/localized-anti-displacement-policies/.
- Jeremy S. Hoffman, Vivek Shandas, and Nicholas Pendleton, “The Effects of Historical Housing Policies on Resident Exposure to Intra-Urban Heat: A Study of 108 US Urban Areas,” Climate 8 (1) (2020): 1–15, available at https://www.mdpi.com/2225-1154/8/1/12.
- U.S. Environmental Protection Agency, “Learn About Heat Islands,” available at https://www.epa.gov/heatislands/learn-about-heat-islands#characteristics (June 2021); Paul Coseo and Larissa Larsen, “How factors of land use/land cover, building configuration, and adjacent heat sources and sinks explain Urban Heat Islands in Chicago,” Landscape and Urban Planning 125 (2014): 117–129, available at https://www.sciencedirect.com/science/article/abs/pii/S0169204614000607; Mehdi P. Heris, Brian Muller, and Alana M. Wilson, “Why Does Planning Matter in Microclimate Management and Urban Heat Mitigation?”, Journal of Planning Education and Research (2019), available at https://journals.sagepub.com/doi/10.1177/0739456X19883000; Brian Stone Jr. and others, “Urban Heat Management in Louisville, Kentucky: A Framework for Climate Adaptation Planning,” Journal of Planning Education and Research (2019), available at https://journals.sagepub.com/doi/10.1177/0739456X19879214; Bev Wilson, “Urban Heat Management and the Legacy of Redlining,” Journal of the American Planning Association 86 (4) (2020): 443–457, available at https://doi.org/10.1080/01944363.2020.1759127. Trees, an important heat-mitigating factor, are more likely to be found in parcels of owner-occupied housing. Because of decades of mortgage lending discrimination and limited access to homeownership, low-income communities of color have fewer trees and greater exposure to heat. See Nik Heynen, Harold A. Perkins, and Parama Roy, “The Political Ecology of Uneven Urban Green Space: The Impact of Political Economy on Race and Ethnicity in Producing Environmental Inequality in Milwaukee,” Urban Affairs Review 42 (1) (2006): 3–25, available at https://journals.sagepub.com/doi/abs/10.1177/1078087406290729. In addition, the construction of high-speed roadways in low-income communities of color has involved heat-retaining materials such as asphalt. See Raymond A. Mohl, “Stop the Road: Freeway Revolts in American Cities,” Journal of Urban History 30 (5) (2004): 674–706, available at https://journals.sagepub.com/doi/10.1177/0096144204265180; Bill M. Jesdale, Rachel Morello-Frosch, and Lara Cushing, “The Racial/Ethnic Distribution of Heat Risk-Related Land Cover in Relation to Residential Segregation” (Bethesda, MA: National Library of Medicine, 2013), available at https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3701995/; Angel Hsu and others, “Disproportionate exposure to urban heat island intensity across major US cities” (London: Nature Communications, 2021), available at https://www.nature.com/articles/s41467-021-22799-5; Jackson Voelkel and others, “Assessing Vulnerability to Urban Heat: A Study of Disproportionate Heat Exposure and Access to Refuge by Socio-Demographic Status in Portland, Oregon,” International Journal of Environmental Research and Public Health 15 (4) (2018): 640, available at https://pubmed.ncbi.nlm.nih.gov/29601546/; Tirthankar Chakraborty and others, “Disproportionately higher exposure to urban heat in lower-income neighborhoods: a multi-city perspective,” Environmental Research Letters 14 (2019): 105003, available at https://iopscience.iop.org/article/10.1088/1748-9326/ab3b99/pdf; Hoffman, Shandas, and Pendleton, “The Effects of Historical Housing Policies on Resident Exposure to Intra-Urban Heat: A Study of 108 US Urban Areas”; Tirthankar Chakraborty and others, “A spatially explicit surface urban heat island database for the United States: Characterization, uncertainties, and possible applications,” ISPRS Journal Photogrammerty and Remote Sensing 168 (2020): 74–88, available at https://www.sciencedirect.com/science/article/abs/pii/S0924271620302082.
- National Weather Service, “Weather Related Fatality and Injury Statistics,” available at https://www.weather.gov/hazstat/ (last accessed June 2022).
- Hsu and others, “Disproportionate exposure to urban heat island intensity across major US cities”; National Integrated Heat Health Information System, “Current Conditions and Future Outlooks,” available at https://nihhis.cpo.noaa.gov/Home/ArtMID/7244/ArticleID/2220/CPO-and-Community-Scientists-to-Map-Urban-Heat-Inequities-in-11-States (last accessed June 2022); Jessdale, Morello-Frosch, and Cushing, “The Racial/Ethnic Distribution of Heat Risk-Related Land Cover in Relation to Residential Segregation.”
- Davies and others, “The unequal vulnerability of communities of color to wildfire.”
- Ibid. The study found that Native American communities were particularly at risk in part because of their history of forced displacement onto federal reservations in areas with a high risk of wildfire.
- Hsu and others, “Disproportionate exposure to urban heat island intensity across major US cities”; National Integrated Heat Health Information System, “Current Conditions and Future Outlooks”; Jessdale, Morello-Frosch, and Cushing, “The Racial/Ethnic Distribution of Heat Risk-Related Land Cover in Relation to Residential Segregation.”
- Rachel Becker, “New report: Drought to hit rural Latino communities hardest,” CalMatters, May 13, 2021, available at https://calmatters.org/environment/2021/05/drought-rural-latino-communities/; Kevin Taylor, “Drought hits harder in already parched Indian Country,” Aljazeera America, March 19, 2014, available at http://america.aljazeera.com/articles/2014/3/19/drought-is-nothingnewinindiancountry.html.
- Ilima Loomis, “Communities of Color Are More Vulnerable to Wildfires,” Eos, November 29, 2018, available at https://eos.org/articles/communities-of-color-are-more-vulnerable-to-wildfires.
- Michela Zonta and Caius Z. Willingham, “A CRA To Meet the Challenge of Climate Change: Advancing the Fight Against Environmental Racism” (Washington: Center for American Progress, 2020), available at https://www.americanprogress.org/article/cra-meet-challenge-climate-change/.
- These pollutants include industry, agriculture, transportation, construction, residential, and recreational sources. See Christopher W. Tessum and others, “PM2.5 polluters disproportionately and systemically affect people of color in the United States,” Science Advances 7 (18) (2021)available at https://www.science.org/doi/pdf/10.1126/sciadv.abf4491.
- National Equity Atlas, “Air pollution: Healthy neighborhoods are free of pollution and toxins that undermind safety, health, and well-being,” available at https://nationalequityatlas.org/indicators/Air-pollution#/?geo=01000000000000000 (last accessed June 2022).
- Tessum and others, “PM2.5 polluters disproportionately and systemically affect people of color in the United States.”
- ScienceDaily, “US black and Hispanic minorities bear disproportionate burden from air pollution,” March 11, 2019, available at https://www.sciencedaily.com/releases/2019/03/190311152735.htm.
- Zack Colman and Katy O’Donnell, “Borrowed time: Climate change threatens U.S. mortgage market,” Politico, June 8, 2020, available at https://www.politico.com/news/2020/06/08/borrowed-time-climate-changemortgage-market-304130. According to the National Oceanic and Atmospheric Administration’s National Centers for Environmental Information, the United States has experienced 323 weather and climate disasters with damages reaching or exceeding $1 billion from 1980 to 2021. In 2020 and 2021 alone, 42 severe disasters cost the nation a total of $257 billion in damages. See National Centers for Environmental Information, “Billion-Dollar Weather and Climate Disasters: Summary Stats,” available at https://www.ncei.noaa.gov/access/monitoring/billions/summary-stats/US/2020-2021 (last accessed July 2022).
- Kousky and Wiley, “Improving the Post-Flood Financial Resilience of Lower-Income Households through Insurance.”
- Ibid. The mandatory purchase requirement for flood insurance, established by the Flood Disaster Protection Act of 1973, still applies only to homeowners with federally backed mortgages residing in properties located in special flood hazard areas delineated by FEMA as part of the National Flood Insurance Program (NFIP). These include loans purchased by the GSEs as well as loans guaranteed and insured by Federal Housing Administration, U.S. Department of Agriculture, and U.S. Department of Veterans Affairs. The Biggert-Waters Flood Insurance Reform Act of 2012 and the Homeowner Flood Insurance Affordability Act of 2014 made some changes to the original legislation. For instance, lenders are required to accept private flood insurance policies meeting specific criteria in order to satisfy the mandatory purchase requirement. See U.S. Government Accountability Office, “National Flood Insurance Program: Congress Should Consider Updating the Mandatory Purchase Requirement,” (Washington: 2021), available at https://www.gao.gov/assets/gao-21-578.pdf. The Government Accountability Office (GAO) report indicates that noncompliance is an important challenge not just for the enterprises but for the U.S. Department of Housing and Urban Development as well. The requirement to purchase and maintain flood insurance does not apply to all properties such as, for example, those located in a special flood hazard area but without a mortgage loan. Also, it does not apply to lenders that do not issue federally backed mortgage loans. According to the GAO, “Community participation in NFIP is voluntary. However, for a community’s residents to purchase flood insurance through the program, the community must participate by agreeing to enforce regulations for land use, building standards, and new construction in special flood hazard areas. Participating communities must also adopt and enforce state and community flood plain management regulations to reduce future flood damage.” U.S. Government Accountability Office, “National Flood Insurance Program: Congress Should Consider Updating the Mandatory Purchase Requirement,” pp. 6–7. The NFIP program faces serious challenges, such as the large amount of debt due to insufficient premium rates. The program is insolvent after having paid out more than it collected for several years. See Colman and O’Donnell, “Borrowed time: Climate change threatens U.S. mortgage market.” Since 2004, in particular, the NFIP has been unable to cover all claims with premiums it had collected and had to borrow funds from the U.S. Department of the Treasury. The NFIP’s troubles were further exacerbated by the severity of major natural disasters such as Hurricane Katrina and Superstorm Sandy, which resulted in catastrophic losses.
- Fannie Mae, “Form 10-K,” available at https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/quarterly-annual-results/2019/q42019.pdf (last accessed September 2022); Leah Platt Boustan and others, “The Effect of Natural Disasters on Economic Activity in US Counties: A Century of Data” (Cambridge, MA: National Bureau of Economic Research, 2017), available at https://www.nber.org/system/files/working_papers/w23410/w23410.pdf.
- Nicholas Kusnetz, “Coastal Flooding Is Erasing Billions in Property Value as Sea Level Rises. That’s Bad News for Cities,” Inside Climate News, February 28, 2019, available at https://insideclimatenews.org/news/28022019/coastal-flooding-home-values-sea-level-rise-climate-change-ocean-city-miami-beach/#:~:text=The%20loss%20in%20property%20values%20points%20to%20a,primary%20revenue%20stream%20for%20funding%20that%20very%20work.
- Leah Platt Boustan and others, “Natural Disasters by Location: Rich Leave and Poor Get Poorer,” Scientific American, July 2, 2017, available at https://www.scientificamerican.com/article/natural-disasters-by-location-rich-leave-and-poor-get-poorer/.
- Colman and O’Donnell, “Borrowed time: Climate change threatens U.S. mortgage market.” Amine Ouazad shows that originations and securitizations in storm surge areas outside of officially designated flood plains have been rising sharply since 2012. See Amine Ouazad, “Coastal Flood Risk in the Mortgage Market: Storm Surge Models’ Predictions vs. Flood Insurance Maps” (2020), available at https://arxiv.org/abs/2006.02977v2.
- Fannie Mae, “Additional Insight into Credit Risk Transfer Reporting for Disaster Relief,” October 18, 2018, available at https://capitalmarkets.fanniemae.com/credit-risk-transfer/single-family-credit-risk-transfer/additional-insight-credit-risk-transfer-reporting-disaster-relief.
- Amine Ouazad and Matthew E. Kahn, “Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters,” (Cambridge, MA: National Bureau of Economic Research, 2019), available at https://www.nber.org/system/files/working_papers/w26322/w26322.pdf.
- Jesse M. Keenan and Jacob T. Bradt, “Underwaterwriting: from theory to empiricism in regional mortgage markets in the U.S.,” Climatic Change 162 (2020): 2043–2067, available at https://link.springer.com/article/10.1007/s10584-020-02734-1. Oftentimes, lenders require bigger down payments in areas at high risk for natural disasters. See Christopher Flavelle, “Rising Seas Threaten an American Institution: The 30-Year Mortgage,” The New York Times, June 19, 2020, available at https://www.nytimes.com/2020/06/19/climate/climate-seas-30-year-mortgage.html.
- Climate-Related Risk Subcommittee, “Managing Climate Risk in the U.S. Financial System” (Washington: U.S. Commodity Futures Trading Commission, 2020), available at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf; Lindsay Owens, “Soaked: A Policy Agenda to Prepare for a Climate-Triggered Housing Crash” (New York: The Great Democracy Initiative 2020), available at https://rooseveltinstitute.org/publications/soaked-a-policy-agenda-to-prepare-for-a-climate-triggered-housing-crash/.
- Ouazad and Kahn, “Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters.”
- Jan Ellen Spiegel, “Mortgage lenders face increasing risks from sea-level rise,” Yale Climate Connections, September 2, 2022, available at https://yaleclimateconnections.org/2020/09/mortgage-lenders-face-increasing-risks-from-sea-level-rise/; Christopher Flavelle, “Climate Risk in the Housing Market Has Echoes of Subprime Crisis, Study Finds,” The New York Times, September 30, 2019, available at https://www.nytimes.com/2019/09/27/climate/mortgage-climate-risk.html.
- U.S. Government Accountability Office, “National Flood Insurance Program: Congress Should Consider Updating the Mandatory Purchase Requirement.”
- Freddie Mac, “Life’s A Beach,” April 2016, available at http://www.freddiemac.com/fmac-resources/research/pdf/April%20Insight%2004%2026%2016.pdf.
- Flood plain maps are static representations of risk and often do not reflect topographic changes and changes due to land development. In addition, it usually takes seven years, on average, to update current maps. See U.S. Government Accountability Office, “National Flood Insurance Program: Congress Should Consider Updating the Mandatory Purchase Requirement.”
- The model covers only the contiguous United States. See also Flavelle and others, “New Data Reveals Hidden Flood Risk Across America.”
- Abebe Jemberie, Daniel Rees, and Yilu Feng, “Managing U.S. Flood Risk: Part II, The New Pluvial Component,” Verisk, March 26, 2020, available at https://www.air-worldwide.com/publications/air-currents/2020/managing-u-s–flood-risk-part-ii-the-new-pluvial-component/.
- Zack Colman, “How climate change could spark the next home mortgage disaster,” Politico, November 30, 2020, available at https://www.politico.com/news/2020/11/30/climate-change-mortgage-housing-environment-433721.
- Connor Maxwell, “America’s Sordid Legacy on Race and Disaster Recovery,” Center for American Progress, April 5, 2018, available at https://www.americanprogress.org/issues/race/news/2018/04/05/448999/americas-sordid-legacy-race-disaster-recovery/.
- Platt, Kully, and Webb, “FHFA Releases Statement on Climate Change.”
- Federal Housing Finance Agency, “Climate Change and Environmental, Social, and Governance (ESG),” available at https://www.fhfa.gov/PolicyProgramsResearch/Programs/Pages/Climate-Change-and-ESG.aspx (last accessed July 2022).
- Federal Housing Finance Agency, “Climate and Natural Disaster Risk Management at the Regulated Entities” (Washington: 2021), available at https://www.fhfa.gov/Media/PublicAffairs/Documents/Climate-and-Natural-Disaster-RFI.pdf.
- Federal Housing Finance Agency, “2022 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions” (Washington: 2021), available at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/2022-Scorecard.pdf.
- Federal Housing Finance Agency, “FHFA Finalizes Strategic Plan for Fiscal Years 2022 – 2026,” Press release, April 14, 2022, available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Finalizes-Strategic-Plan-for-Fiscal-Years-2022-to-2026.aspx; Federal Housing Finance Agency, “Strategic Plan: Fiscal Years 2022 – 2026” (Washington: 2022), available at https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA_StrategicPlan_2022-2026_Final.pdf.
- Ibid., p 9.
- Federal Housing Finance Agency, “FHFA Announces Equitable Housing Finance Plans for Fannie Mae and Freddie Mac,” Press release, June 8, 2022, available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Equitable-Housing-Finance-Plans–for-Fannie-Mae-and-Freddie-Mac.aspx.
- One exception is the recommendation in Freddie Mac’s strategic plan to boost climate-resilient rehabilitation strategies in multifamily developments.
- Federal Housing Finance Agency, “Fannie Mae & Freddie Mac Affordable Housing Goals,” available at https://www.fhfa.gov/PolicyProgramsResearch/Programs/AffordableHousing/Pages/Affordable-Housing-FNMandFRE.aspx#:~:text=There%20are%20three%20multifamily%20housing%20goals%3A%20a%20goal,to%2050-unit%29%20multifamily%20properties%20affordable%20to%20low-income%20families (last accessed June 2022).
- Michela Zonta, “Do the GSEs Meet the Credit Needs of Underserved Communities of Color?”, Cityscape 17 (3) (2015), available at https://www.huduser.gov/portal/periodicals/cityscpe/vol17num3/ch11.pdf.
- Federal Housing Finance Agency, “FHFA Proposes 2022-2024 Housing Goals for Fannie Mae and Freddie Mac,” Press release, August 18, 2021, available at https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Proposes-2022-2024-Housing-Goals-for-Fannie-Mae-and-Freddie-Mac.aspx.
- U.S. Environmental Protection Agency, “EJSCREEN: Environmental Justice Screening and Mapping Tool. Overview of Environmental Indicators in EJSCREEN,” available at https://www.epa.gov/ejscreen/overview-environmental-indicators-ejscreen; U.S. Environmental Protection Agency, “Climate Change Indicators in the United States,” available at https://www.epa.gov/climate-indicators (last accessed July 2022).
- Federal Emergency Management Agency, “The National Index,” available at https://hazards.fema.gov/nri/ (last accessed June 2022).
- Zonta and Willingham, “A CRA To Meet the Challenge of Climate Change: Advancing the Fight Against Environmental Racism.”
- Climate and Economic Justice Screening Tool, “Explore the map.”
- First Street Foundation, “Home,” available at https://firststreet.org/ (last accessed June 2022).
- Naveena Sadasivam, “How homeowners of color are threatened by climate change — and climate policy,” Grist, June 23, 2021, available at https://grist.org/housing/fhfa-fannie-mae-freddie-mac-mortgages-climate-risk/.
The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here. American Progress would like to acknowledge the many generous supporters who make our work possible.
Senior Policy Analyst, Housing Policy