An Overview of FHFA’s Key Initiatives to Address Climate-Related Financial Risks

The Federal Housing Finance Agency (FHFA) recognizes that the growing frequency and severity of natural disasters, as well as rapidly increasing insurance costs, presents a serious threat to homeowners, renters, and the U.S. housing finance system. As a result, FHFA has been engaging in a variety of activities to address this risk, as have FHFA’s regulated entities, Fannie Mae and Freddie Mac (the Enterprises) and the Federal Home Loan Banks (FHLBanks).

FHFA’s 2022-2026 Strategic Plan identifies the risks posed by climate change and natural disasters as a critical element for ensuring the safety and soundness of the Enterprises. The Strategic Plan calls for incorporating climate change into regulated entity governance by conducting research, and improving data collection, analysis, and reporting. It recognizes that climate risk may be a source of shocks to the financial system in the years ahead, increasing credit risk and credit-related expenses. The uncertainty of these impacts require concerted effort over time to identify, measure, and appropriately manage related risks. FHFA also acknowledges that the threats posed often create challenges for the most vulnerable populations, including older adults, low-income households, and families with small children.

This blog post outlines the key programs and initiatives FHFA and the Enterprises have undertaken to reduce the regulated entities’ exposure to climate-related financial risks and in turn increase access to affordable and sustainable housing. These programs aim to address climate-related risk in various ways, including providing temporary relief to help borrowers recover after a disaster, promoting energy-efficient and resilient housing, integrating climate-related financial issues into the Enterprises’ overall risk management frameworks, tackling climate-related insurance challenges, and protecting vulnerable populations.

Disaster Relief Programs and Disaster Playbooks

FHFA and the Enterprises maintain natural disaster playbooks that are used in the wake of major disaster declarations. The playbooks were developed in response to the 2017 hurricane season and have served since then as a protocol for responding to natural disasters. The plans outline the communications, both internal and external, that occur, including the issuance of press releases that alert borrowers and servicers to the types of assistance available after disasters, monitoring of portfolio and counterparty impacts from the disaster, and ongoing monitoring of delinquency rates and the use of loss mitigation options. In addition, FHFA has a disaster response team with representatives from multiple divisions to share information and facilitate disaster response activities.

The relief options available through the Enterprises include disaster forbearance, reinstatement, repayment plans, disaster payment deferrals, and loan modifications. These relief efforts have successfully reached a wide range of borrowers impacted by disasters, helping them get back on track. For Hurricanes Helene and Milton, preliminary data shows that about 17,000 borrowers received disaster forbearance in October in Florida, Georgia, North Carolina, and South Carolina.^[1]

Green and Resilient Financing Products

In the United States, approximately 20 percent of greenhouse gas (GHG) emissions are attributed to residential households.^[2] To address this significant environmental challenge, the Enterprises have developed Single-Family and Multifamily Green Bond products. The eligible collateral for Green mortgage-backed securities (MBS) includes homes with renewable energy and homes with an energy efficiency rating.

In 2023 alone, the Enterprises issued more than $11 billion in green bonds across their Single-Family and Multifamily portfolios.^[3] Fannie Mae estimates that its almost $9 billion in Green Bonds financed 51,000 more-efficient housing units in 2023, which corresponds to 699 million kBtu of projected source energy savings, 126 million gallons of projected water savings, and 34,000 mtCO2e of projected GHG emissions prevented.^[4] Freddie Mac found that its Single-Family Green MBS issuances save each homeowner $698 in annual utility costs, on average, and that the energy-efficient features of the homes associated with these bonds yielded emissions savings that are equivalent to removing 2,700 vehicles from the road for a year.^[5] Through this initiative, the Enterprises, who play a leading role in the mortgage finance market, are fostering a shift toward greener, more sustainable housing solutions, benefiting both the environment and the economy.

Additionally, FHFA and the Enterprises have created programs to enable the use of the Inflation Reduction Act’s Greenhouse Gas Reduction Fund (GGRF) to finance decarbonization on Enterprise-backed multifamily properties. FHFA also permits the Enterprises to make Low-Income Housing Tax Credit (LIHTC) investments that support green building, including the purchase of associated tax credits (45L and 48). Furthermore, FHFA is leading a solar initiative, collaborating with the U.S. Department of Housing and Urban Development (HUD), the Enterprises, the Consumer Financial Protection Bureau (CFPB), and the U.S. Department of Energy (DOE) to identify ways to enable and reduce barriers to solar adoption on multifamily properties.

The Enterprises have also developed Resilient Housing Financing programs. Freddie Mac CHOICERenovation® loans allow borrowers to finance home improvements that protect against disasters like fires, floods, hurricanes, and earthquakes. Fannie Mae offers HomeStyle® Energy loans for energy and resiliency upgrades. These products and programs aim to promote sustainability by encouraging property owners, developers, and builders to invest in energy efficiency improvements for residential properties.

Climate-Related Risk Management Advisory Bulletins and Scorecard Projects 

Advisory Bulletins 

FHFA issued two Advisory Bulletins in 2024 on Climate-Related Risk Management for the Enterprises and FHLBanks.^[6] The advisory bulletins provide guidance to the Enterprises and FHLBanks on managing climate-related risks by establishing a framework to integrate these risks into existing risk management programs. Specifically, each climate-related risk management framework should include five components: (1) governance; (2) risk identification and assessment, controls, and monitoring processes; (3) metrics and data; (4) scenario analysis; and (5) risk reporting and communication processes.

Scorecard Projects 

While the Advisory Bulletins provide strategic guidance on climate-related risk management, FHFA supplements these bulletins by issuing more detailed guidance through the Conservatorship Scorecard for the Enterprises.

FHFA’s Scorecard projects were initially issued in 2012 and are updated annually.^[7] Several of these Scorecard projects in the last few years are related to climate and natural disaster risks. In the data and research category, the Scorecard directs the Enterprises to develop climate risk research agendas, which include identifying data gaps and strategies to address them. For assessing climate risk exposure, the Scorecard instructs the Enterprises to develop tools, including Climate Scenario Analysis, to assess their exposure to physical and transition risks. The governance section of the Scorecard mandates that the Enterprises establish standards for integration of climate risk into overall corporate governance and strategic planning. In addition, under FHFA’s guidance, the Enterprises have continued to publish annual reports disclosing their respective climate- and sustainability-related progress to the public.^[8]

The progress made on these Scorecard projects has been shared with the public through several blog posts on FHFA’s Climate Risk Webpage. Moreover, in 2024, the Enterprises shared preliminary research on topics including mortgage performance following a disaster, impacts of flood disclosure requirements on house prices, housing demand impacts from insurance unavailability following wildfire risk, and migration trends to areas with higher climate risk possibly because houses there are comparatively more affordable. The Enterprises are working to close data gaps and improve their understanding of how climate risk will impact borrowers and renters. Both Enterprises disseminate this important research to the public through events such as FHFA’s Fall 2024 Econ Summit on Climate Risk and research conferences. These activities enhance the Enterprises’ capabilities to measure, monitor, and effectively manage climate-related risks.

FHFA reported on these activities in its 2024 Performance and Accountability Report, where the strategic objective for incorporating climate change into regulated entity governance was successfully achieved. Items related to this goal included climate-risk related research and development of guidance for the Enterprises and the FHLBanks to address climate risk. In 2023, FHFA released its “FHLBank System at 100: Focusing on the Future” report, which followed a comprehensive review of the FHLBank System.^[9] The report outlines information about incorporating climate risk into credit evaluations and indicates that the FHLBanks’ assets are supported by collateral whose value could potentially decrease as a result of climate-related risks.

Furthermore, FHFA published a new, first-of-its-kind Mortgage Loan and Natural Disaster Dashboard to assess and evaluate the impact of climate risk on vulnerable communities in the United States. In tandem with the release of the Dashboard, FHFA published a blog evaluating the impact of hurricanes on loan acquisitions, social vulnerability, and community resilience.^[10] FHFA staff have also released several working papers on climate-related risks in 2023 and 2024 and shared this work through blog posts, conferences, and academic journals.^[11]

FHFA and the Enterprises have conducted exploratory Climate Scenario Analysis to measure the Enterprises’ exposure to flood risk, using a range of potential scenarios, methodologies, and assumptions.^[12] FHFA and the Enterprises have also modeled potential challenges associated with local legislation mandating building decarbonization.^[13] These exploratory exercises highlight the fact that historical models may experience difficulty in predicting future impacts. FHFA and the Enterprises are working to close existing data and methodology gaps in Climate Scenario Analysis, such that the Enterprises will be able to quantify the losses caused by extreme climate events at the property level and develop effective risk management strategies.

Addressing Climate-Related Insurance Challenges

Many property insurance companies, particularly in high-risk areas like Florida and California, are either withdrawing from these markets or raising premiums due to the increasing frequency and severity of climate-related events, such as floods, wildfires, and earthquakes. This reduction in coverage options and the rising costs of insurance are leaving homeowners more vulnerable to the impacts of natural disasters. Moreover, flood events frequently occur in areas not designated as special flood hazard areas, where the Enterprises do not mandate flood insurance for homeowners, potentially resulting in financial losses for homeowners.

FHFA and the Enterprises are making efforts to address these climate-related insurance challenges. In late 2023 and early 2024, FHFA organized single-family and multifamily insurance symposiums to foster meaningful dialogue on the growing challenges related to the availability and affordability of property insurance. FHFA also developed internal single-family and multifamily insurance scorecards, which instruct the Enterprises to identify opportunities to mitigate risk and further sustainable homeownership by addressing the accessibility, availability, and affordability of property insurance.

Protecting Vulnerable Populations

Climate risk may have profound impacts on home valuation and household wealth; the costs to heat, cool, and sustain one’s home; and internal migration. Low-income and underserved populations are at a distinct disadvantage due to existing wealth and income disparities that limit their ability to adapt, recover, and move. Additionally, historical patterns of resource allocation and infrastructure development have impaired the ability of underserved communities to prepare for natural disasters and the impacts of climate change.

In 2022, FHFA and the Enterprises began to explore the intersection of climate change, housing finance, housing policy, and community development. Through extensive community engagement and outreach efforts to learn what issues are impacting vulnerable communities across the United States, FHFA has developed a more comprehensive view of climate risk challenges and opportunities specific to housing finance.

FHFA has incorporated climate change considerations into its policy analysis and oversight of the Enterprises, which informs the Agency’s view and approach to addressing natural disasters and climate change.

The Enterprises have also taken steps to provide education on the impact of climate change and natural disasters on consumers, including the creation of free education content and resources, disclosures on their Real Estate Owned (REO) websites, and provision of technical assistance to local partners. Recently, FHFA issued an Advisory Bulletin on Unfair or Deceptive Acts or Practices compliance.^[14] This guidance includes examples of how a lack of flood history disclosure may result in a deceptive act or practice if it is likely to materially mislead a reasonable consumer.

Conclusions

FHFA’s progress in addressing the impacts of climate-related financial risk has been assessed by external parties, such as Ceres. In its 2023 Climate Risk Scorecard report, Ceres noted FHFA “led the way” in advancements on climate work. In the Ceres 2024 report, FHFA again received the highest rating of all agencies assessed across nine scorecard items, affirming FHFA’s commitment to addressing the impacts of climate-related financial risk.

Looking ahead, FHFA’s continued efforts to address climate-related financial risk will play a crucial role in ensuring the resilience of the U.S. housing finance system. Through initiatives like disaster relief programs, green financing, and robust climate risk management guidance, FHFA is laying the foundation for a sustainable and adaptable housing market. This work will help the housing finance sector prepare for future climate risks and secure the long-term stability of homeownership and housing finance.