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"Mentioned the flood maps and that drives a question. I I wanted to ask which it has to do with flood insurance right because so in theory if I have flood insurance for my home and my home floods than the insurance should repay me for the damage and I shouldn't be particularly more likely to default on my mortgage which is really the risk here from the lender's perspective right so is this largely function of the fact that People do not people who should have flood insurance do because of climate change because is the hurricanes are getting stronger and so on do not because the flood maps are out of date and as a result. There's this disconnect that makes the mortgages really risky or is it true even if you do have flood insurance right so Technically households have to purchase a flood insurance when when they're buying a home. That is in what we call the special flood hazard area which is An area of in the what is called the hundred year flood plain plane which is an area that is supposed to be hit with a one percent of probability. That doesn't mean that it it's hit only once every hundred years but on average it's once over one hundred years Now the the there's That that should lead to fewer defaults on and more prepayments and since Fannie and Freddie do not insure commercial lenders against the risk of prepayment You know if households were insured ensure there would be no paper. We wouldn't be writing this paper in so in our Bloomberg piece we. The title is When Mortgages Cau- when when climate risk causes mortgage defaults. And so we really think that's what's important is that there's been a very significant decline in the take-up of flood insurance My contacts in in Both the US Congress in in the Commercial Lending World Tell me that one of the issues is a a lack of enforcement of the flood. Insurance Mandate so numbers from Caroline. Hausky at at Warton showed that there is a substantial decline in the number of flood insurance policies purchased. It's just over time since two thousand eight and that's both in numbers and in dollar volume of flood insurance policies so there's been a declining to take up a flow insurance policies even though the risk is increasing. So it's really concerning so that's one thing the second problem we face is that households who who are purchasing house that is at risk of flooding but the house is not in the special flood hazard area because the map is outdated are not required to purchase insurance. And they're much more likely to default in that case So we think that what's going what may be happening. Is that the Klein of the national flood. Insurance Program may lead to much more for climate risk burden of on the balance sheets of the. GS's that the GS's may be substituting for flood insurance so the New York Times sort of brought up a piece on your research and and said that this has they said call that. Echoes of the subprime crisis. I guess I want to get your take on whether that feels like a good characterization to you because the the worry that they're implying is basically we have all these lenders who are further along recognizing climate risk than the flood flood maps and then Fannie and Freddie are able to screen for they originate a ton of risky mortgages offload them onto fannie and Freddie which are basically backed by yeah the tax payer and so- Fannie and Freddie get stuck holding a bunch of bad mortgages which is similar to what happened at least part of what happened in the last financial crisis although it would be for different reason do you think that it it has that level of concern. Look I was talking to a policymaker Z.. Maker And who is telling me. Look there's no problem with fending Freddie the profitable the profitable companies and I replied that Fannie and Freddie were we're also profitable in two thousand six So you know the kind of risks that they're taking on their balance sheet is is long term risk. It's not something that is realized sized on an annual basis but it's something that slowly builds up and at some point it becomes too late for us to to sort of put out the fire That the the the risk that is taken on by those companies may be too large at some point so we really need to react early on think about it mortgages are have a maturity of thirty years so so we really need to anticipate what's going to happen before it's too late and what's also concerning. Is that when I speak to the private sector They are very aware of the risk and some of them have very good data science staff that builds extremely accurate forecasts of of I shouldn't say accurate extremely accurate but I guess builds very precise forecasts of climate risk and so they're investing millions of dollars in trying to understand What's happening and we think that it's really important at F- HFA FA Which is the federal agency that supervises Fannie and Freddie is working at the same pace as the private sector actor and so so yes To generally said that our work is a little bit like the big short meets. Al Gore's an inconvenient truth In the sense that you know some of the risks that the big short highlighted The packaging of loans mortgage backed securities. the off loading of the bad risk the market for Lemons in Securitization They could be year for climate risk And and I think it's it's concerning when the federal government May Not moving at the same pace as the private sector. Do you think we might see the same things for other types of natural troll disasters. I mean I live in northern California where facing wildfires here might you see something similar around wildfire areas or tornadoes and floods in the mid West best. Or do you think this is going to be. I mean I know that a big chunk of the for example insured losses due to natural disaster. Come in just a couple of states. Because of hurricanes McCain's because they're so destructive but the impacts of climate change are broader and the natural disasters that that impacts broader. I'm curious what you think about all those other areas of the country in types of disasters. Yeah one of the key questions is you know how how predictable or those risks And and Aw We we haven't worked on wildfires for that specific question yet but our hunch may is that while fires the the specific location of wildfires may be less predictable than specific location of the floods. And so may be less learning there. But we think it's really important cordoned question that needs to be addressed and So so we we. We have very good data on wildfires and Dan. That's one of the Next research projects that we have which is which is to see whether lenders learning about wildfire risk and and are selling their bad wildfire risk to the government sponsored enterprises So we do think it's A. It's a concern in the case of hurricanes There's there's two things that are important one is that The increase in global temperature leads to increase in sea surface temperature which is a a significant predictor of the intensity of the hurricane season And we've got local measures of elevation of of Land cover that. Allow us to get you know reasonably good forecasts of flood risk so the element amount of predictability is really important If lenders are able to predict that risk and fending Freddie are not Doing the due diligence to forecast those risks than we're facing some systemic risk here. I don't know if you've done this but it do. You have any kind of estimate of let's just say this continues to play out How big a risk? How how big an impact might we see ultimately me on the Economics Fannie and Freddie and thus on their solvency and thus on the American taxpayer you know went? I've I've spent a wonderful wonderful evenings with a cup of tea reading the annual reports of Fannie and Freddie And you do see that this the the actually right down the some of the provisions for losses That they made after Hurricane Katrina After Hurricane Harvey and and Right after Hurricane Katrina in two thousand in the two thousand six annual report they write the made provisions for losses of hundreds of millions of dollars others due to Hurricane Katrina so For the more recent hurricanes they don't break it down by Hurricane Rickie For some for some reason we want more transparency on these losses but You know if you if you think about sixty sixty five percent I said sixty five percent of mortgages are securitized on average There's about one hundred billion dollars originated every year. So that's accumulative initiative hundred billion dollars every year in coastal areas are originated Now so if we see you know increase in defaults of a few you percentage points due to climate risk We're starting to talk about you. Know billions of dollars of losses there born by US taxpayers And of course you know there's also some tail risk that What if our forecast or rosy and optimistic in what if we we we really exceed the targets of the international panel for Climate Change So so so that's that's why we're concerned about the detail risk that makes the losses Go from a few billion dollars to tens of billions of dollars And so so that's what we were concerned about And and we think that lenders should sort of reflect this kind of risk in their pricing in their or interest rates In their decisions to underwrite loans. Okay so let me give you my a lay person's understanding of everything that we're talking about here and you can tell me what. Yeah I've got wrong. Basically what's happening is that at the local level there are lenders. Who are you know? Giving mortgages to new homeowners honors in areas where there is risk of flood largely due to hurricane and particularly certain areas where there there is sort of new risk of flood where these one in one hundred year floods aren't really supposed to hit these areas but they are hitting them and they're hitting them more than once every hundred hundred years and so famous flood maps haven't caught up with that they're not required to get flood insurance and so these mortgages are as a result probably more risky than the mortgages that you might see if you didn't have flood risk or if you did if what risk but were insured against it and local lenders and commercial banks seem to be based on your data recognizing this after the first natural disaster hits the area and as a result changing being their lending behavior such that they can offload more a larger share of their mortgages onto Fannie and Freddie who were basically stuck taking it because because they can't bake these calculations into their own assessment and so ultimately if that all plays out and he's mortgages turned out to be riskier and there is a higher risk of default. Then we might see you know billions of dollars potentially of losses to the American taxpayer via Fannie and Freddie because we're wearing airing all the climate risk in these mortgages is that right and sort of. How concerned should we be as taxpayers as a result? Oh I I think we should be concerned because these you know potential tens of billions of dollars of losses that we may be incurring Are GonNa take money away from other programs And so they're gonNA take money away from education for Help for homeowners in in safe areas and and that's going to cost the jobs There's an and opportunity costs of guaranteeing."
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