MBA Asks FHFA to Align Actions on Climate Change with Core Principles

The Mortgage Bankers Association recommended the Federal Housing Finance Agency align its actions on climate change and natural disaster risks with a set of core principles to reduce risk.

The Apr. 19 letter to FHFA Director Mark Calabria outlines seven principles MBA believes would reduce externalities that are a product of under-insured risks.

“FHFA should align with other regulators whenever appropriate to do so, but also recognize the unique business models of their regulated entities and work with them to foster a common approach for real estate finance markets,” wrote MBA President & CEO Robert Broeksmit, CMB. “FHFA should also work closely with the government housing agencies to pursue a common approach on mortgage-specific topics. At a macro level, recognizing that addressing climate risk more broadly will take a whole-of-government approach, FHFA should leverage the work of other agencies to the maximum extent possible.”

The letter comes in response to a January FHFA Request for Information on climate and natural disaster risk management at the regulated. The RFI asked for feedback on the potential for increasing climate and natural disaster risk to impact its regulated entities and the broader real estate finance system.

The MBA letter said FHFA’s focus on climate change and natural disaster risk is timely, noting the frequency and severity of hurricanes, flooding and wildfires have increased over the past several decades. Broeksmit noted MBA and its members are focused on the potential for direct losses from natural disasters and climate risks, for changing operational requirements for firms and the industry, for potential transitions for existing businesses and markets and for potential changes to regulatory requirements that would impact real estate and real estate finance markets.

“Direct physical risks are not the only changes for which firms must prepare; they also must prepare for changes that may arise as individuals, companies, investors and governments globally are responding to climate and rising natural disaster risk in multiple ways,” MBA said. “Some are taking specific actions to reduce their own carbon emissions or shift activities in ways that could directly mitigate climate risk. Others are working to put in place restrictions, regulations, requirements, or other guideposts that would push other actors within the economy to make such changes. By fostering market and other transitions, these actions have the potential to lead to losses or raise costs for lenders, servicers, insurers, and investors active in real estate finance.”

MBA encouraged FHFA to align its actions on climate change and natural disaster risks with a set of core principles, including the following:

1. Recognize FHFA’s specific role with respect to climate-change and natural disaster policy responses, consistent with FHFA’s statutory mission and authorities.

2. Leverage existing FHFA supervisory processes and practices.

3. Leverage the regulated entities’ existing risk-management systems, processes and governance.

4. Employ a principles-based rather than a prescriptive approach, leaving room for flexibility, tailoring and innovation.

5. Leverage and harmonize FHFA’s approach to climate change and natural disaster risk with the actions of other financial institution supervisors.

6. Establish national standards for the regulated entities’ climate-related mortgage risks to avoid inconsistent regulation at the state level.

7. Be mindful of any conflicts or tradeoffs between the regulated entities’ need to manage climate change and natural disaster risks and to fulfill their charter mandates.

“While this effort presents new challenges, MBA believes that the responses can be usefully implemented within the existing risk management practices of the regulated entities, and the existing supervisory practices of FHFA,” MBA said. “Ongoing focus on developing robust servicing procedures to help borrowers and the system be more resilient following a crisis will be critically important. Efforts to continue to re-evaluate underwriting and other credit risk management practices in the presence of changing economic and other conditions will be necessary. MBA’s view is that these are evolutionary rather than revolutionary changes in risk management.”