RIHA Releases Second Collection of Essays on Climate Change’s Impact on Real Estate Finance

The Mortgage Bankers Association’s Research Institute for Housing America published a second collection of essays that addresses affects of climate change on the real estate finance industry.  

“RIHA’s essays on climate change will help the real estate finance industry better understand climate risk and ways to mitigate it. Developing strategies to address climate change remains a top priority within the industry and I am grateful to the authors for their contributions,” said Edward Seiler, Executive Director of RIHA and MBA Associate Vice President of Housing Economics.

A Collection of Essays on Climate Risk and the Housing Market was developed in response to growing interest from industry participants on how various issues were connected to climate risk. The study features four essays from industry experts that focus on topline issues related to climate risk and its impact on the housing market. This latest edition, Volume II, contains essays written by Milliman Inc., and Andrew Davidson & Co. Inc., respectively. Volume I was released in February.

“Both the insurance industry and housing market face significant challenges from climate change. By including Milliman’s insurance expertise in this compendium, RIHA recognizes that not only are climate change resilience, improved data transparency, incorporation of sophisticated catastrophe models for risk assessment, and product innovation essential, but also that intermarket collaboration by the insurance and housing industries will be necessary to ensure stability going forward,” said Andrew Pai, Actuary with Milliman Inc., and Co-Author of Climate Change: Challenges for Insurance and Housing Markets.

“AD&Co. is very excited and grateful to be contributing to this much needed discussion within the financial and mortgage analytics community. We look forward to operationalizing the ideas presented in our essay and engaging with firms to implement a parsimonious, granular, and broadly useful solution that significantly extends the utility of our existing products,” said Eknath Belbase, Director of Andrew Davidson & Co., Inc. and Co-Author of Conditioning Mortgage Credit Analysis on Climate Risk: General Approach & Florida Case Study.

Milliman Inc., wrote the third essay in the compendium, Climate Change: Challenges for Insurance and Housing Markets. The essay reviews the emerging impacts of climate change on property insurance and how, in turn, the changes in property insurance will affect housing markets. Key takeaways include:

• Property insurance is often the first line of financial defense for both homeowners and lenders in the event a property is damaged.
• Physical risks associated with climate change directly impact insurance liabilities in the form of increasing frequency and severity of natural disasters.
• Transition risks could potentially impact insurers indirectly through increased investment risk. While the effects of transition risk on insurers may not be acute, insurers that are heavily invested in carbon-reliant assets should evaluate investment strategies to prepare for potential devaluation of these assets.
• A healthy private insurance market is essential to a stable housing market. Changes in insurance availability and affordability in areas impacted by climate change present risks to property values, mortgage lending, and sustainable homeownership.

Andrew Davidson & Co. Inc. prepared the final essay, Conditioning Mortgage Credit Analysis on Climate Risk: General Approach & Florida Case Study. The essay provides details on an approach to condition behavioral mortgage and house price models on variability in climate risk as represented economically by variability in rising insurance premiums. Key takeaways include:

• The incorporation of granular property-level climate risk forecasts as encapsulated in rising insurance premiums marks a significant step in the evolution of mortgage models.
• A granular approach, while more complex to setup than a macro approach (that measures climate risk at a state- or MSA-level), includes the ability to meet all the requirements from regulators and investors and gives the ability to make loan-level pricing and risk decisions by keeping the data appropriately granular based on the specific climate hazard.

In September 2021, RIHA released The Impact of Climate Change on Housing and Housing Finance, a study divided into four sections: what is known so far about climate change; the likely impacts to housing and housing finance; strategies that can mitigate climate change or adapt to the part of climate change that cannot be averted; and the ways firms in housing and housing finance can articulate and measure their exposure to climate change.  

RIHA is a 501(c)(3) trust fund. RIHA’s chief purpose is to encourage and assist – through grants to distinguished scholars and subject matter experts, educational institutions, research facilities and government organizations – establishment of a broader-based knowledge of mortgage banking and real estate finance. You can find additional studies on RIHA’s website: www.housingamerica.org.