Dan Ortiz of Enact: The Impacts of Climate Change on the Mortgage Industry

Dan Ortiz is Director of Risk Management with Enact, Raleigh, N.C., responsible for enterprise risk management (ERM), risk governance and business continuity. He is an Advisory Board Member of the NC State Enterprise Risk Management Initiative and is recognized as an ERM Fellow at North Carolina State University. The statements provided are the opinions of Dan Ortiz and do not necessarily reflect the views of Enact or its management.

Climate change may seem like a distant topic to many, but it has the potential to affect various industries in many different ways. The mortgage industry, in particular, faces unique risks due to climate change and its impacts.

While adding a few extra degrees to the average temperature of our planet may not sound like much, it is having severe impact across the world. Weather extremes brought about by climate change, like wildfires, severe hurricanes, droughts, cyclones, and floods, can cause significant property damage.

CoreLogic reports that in 2021, major natural catastrophes resulted in $56.92 billion in losses.

This issue is a real threat that companies should be preparing for in their risk management programs. Let’s explore how climate change affects the mortgage industry and what we can do to prepare.

What are the types of risk brought about by climate change?

Climate risk can be separated into two categories: physical risk and transition risk. Think of physical risk as the physical impacts of climate change. These are the extreme weather events like hurricanes, droughts, and wildfires that we see all too often. These events not only damage property and wildlife, but industries like agriculture too.

A big story in the summer of 2022 was the drought in the Southwestern United States. According to NASA, Lake Mead, which serves nearly 20 million people and a significant amount of farmland across 3 states and Mexico, is the lowest it’s ever been since its creation. Another physical risk is flooding, a Federal Emergency Management Agency report indicates that flood zones are changing due to severe storms and rising sea levels.

All of these physical risks stand to affect the mortgage industry by the potential damage they pose to property, including mortgaged homes.

Transition risk, on the other hand, can take quite a few forms, but each has to do with the way we, as people, respond to climate change. For example, regulations are changing to protect the environment and combat climate change. Last year, the Environmental Protection Agency issued a rule that will reduce U.S. production and consumption of hydrofluorocarbons (also referred to as HFCs) by 85% over the next 15 years. Experts believe that a global phasedown of HFCs could avoid up to 0.5 C of global warming by 2100.

Similarly, people may change their investment behaviors in response to climate change, with some investors having less interest in oil companies or other companies seen as contributing to climate change. Instead, there is a growing interest in investing in environmental, social, and governance (ESG) funds. ESG investment assets are set to increase rapidly from about $35 trillion in early 2022 to $50 trillion by 2025, according to Bloomberg News.

This transition risk can affect the mortgage industry through changes in policy, regulations, technology, and market actions that aim to reduce carbon emissions or otherwise mitigate the effects of climate change.

What are the outcomes of climate change impacting real estate and mortgages?

As climate change occurs, areas of higher risk will likely experience more natural disasters, which will impact the quality of life of residents. In addition, hazard insurance in high-risk areas may become increasingly expensive or unavailable for certain perils. Building regulations also could change in certain high-risk areas.

The main impact will be migration from areas of higher risk to areas of lower risk. The Guardian reports that the climate crisis is already significantly impacting internal migration in the United States. In 2018, 1.2 million people were displaced by extreme conditions, including fire, storms, and flooding. By 2020, the toll had reached 1.7 million annually. Additionally, natural disasters, such as drought, may impact certain industries along with the local economy.

As migration occurs , normal market forces will likely impact home price appreciation. Home values will likely rise more in areas people want to move to and may decrease in areas with declining populations, or areas that are at higher risk to climate change.

How can lenders prepare?

It is no longer a matter of if climate change will affect our industry – it is the question of when and how. Now is the time to learn about the current state and potential future impacts of climate change. The question to ask is: What is the time horizon of your exposure versus the time horizon of the potential impact of climate change in any geographical region? This may primarily impact portfolio lenders. A lender can change their appetite for lending in certain areas over time as they learn more about how climate change is projected to impact that geographic area.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)