Natural Disaster Risk at Center of New FHFA RFI

The Federal Housing Finance Agency (FHFA) has issued a Request for Input (RFI) on the impact of natural disaster risk to the housing finance system as a whole and to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks in particular.

In its RFI, the agency noted, “As a prudential financial regulator, FHFA does not have expertise in climate science.” Nonetheless, the agency also acknowledged that “natural disasters could result in increased delinquency rates, default rates, credit losses, credit-related expenses, and loan loss frequency and severity.”

The RFI is focused on two specific considerations. The first seeks a standard in identifying and assessing climate and natural disaster risk, which includes setting the methodologies in measuring and monitoring these risks while establishing risk management strategies and approaches related to issues including pricing, insurance, credit risk transfers, loss mitigation, and disaster response.

The second consideration examines the FHFA’s supervisory and regulatory framework in assessing and managing these risks, with concerns ranging from how the agency supervises the climate and natural disaster risk management within its regulated entities and how to prioritize the risks that require regulatory oversight.

The FHFA also pointed out that this level of regulation could generate unintended results, ranging from the implementation of policies that result in increased housing costs, which would negatively affect lower-income households, to the creation of policies that would mitigate the higher delinquency rates that minority borrowers have traditionally experienced following natural disasters. The FHFA also questioned whether it should partner with other government agencies or programs that could enhance its work in this area.

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

The FHFA will accept feedback for its RFI through April 19.