The FHFA’s Advisory Bulletin on Climate-Risk Management1

Over the past few years, federal regulators have started to pay closer attention to climate-related risks in the real estate and mortgage markets. One of these efforts culminated in May 2024, when the Federal Housing Finance Agency (FHFA) issued a much anticipated advisory bulletin providing climate-related risk management guidance to Fannie Mae, Freddie Mac, and the Common Securitization Solutions. Since the FHFA issued the original request for information (RFI) on “Climate and Natural Disaster Risk” in January 20212, the regulator and the regulated entities have worked extensively to sharpen their understanding of risks to the agencies’ missions and financial stability as temperatures rise and weather systems become more volatile.

The FHFA’s bulletin signals a significant development in the regulator’s expectations for climate risk measurement and mitigation at the agencies. In it, they wrote:

“A. Risk Identification and Assessment

Several recent FHFA publications and discussions3 about credit risk at the agencies have centered around affordability concerns and potential asset value declines as a result of ongoing insurance market problems. A two-day Single-Family Insurance Symposium organized by the FHFA last November included sessions focused on insurability and climate resilience, highlighting the increasingly difficult situation for borrowers and the need for the agencies to move quickly on risk mitigation.

In addition to the extensive guidance on “Risk identification and Assessment, Controls, and Risk Monitoring Processes,” the bulletin covers new expectations around “Metrics and Data” and “Scenario Analysis.”

The FHFA’s guidance makes it clear that the credit risks associated with climate change should be a significant concern — for both the regulated entities and for fixed-income investors in Credit Risk Transfer (CRT) bonds.

CRT bonds are an agency’s first line of defense against unanticipated losses that arise from credit issues like those that may result from insurance cost shocks. While structural credit enhancements have been sufficient to protect even below-investment-grade CRT buyers in past disaster events when 1-5% of collateral were impacted4, the insurance market challenges may threaten 15 to 20% of borrowers based on exposure estimates from ICE Climate Credit Analytics. This may require a new level of climate risk diligence by CRT investors.

Recently, ICE has been working proactively with DeltaTerra Capital to measure the impact of insurance market issues on borrower debt serviceability and home values and to translate these risks into downstream impacts on mortgage credit metrics and scenario-driven loss analyses like those prescribed in the new FHFA guidance. Beyond the application of this new risk assessment capability for lenders and regulators, ICE is also addressing the needs of fixed income investors by providing bond and pool level scenario assessments for all outstanding Credit Risk Transfer (CRT) bonds.

The below example of scenario pool loss projections in the DeltaTerra Klima® climate-driven correction scenarios compared with tranche credit enhancement for a recent Fannie Mae deal illustrates this point.

Accurate loss projections are critical for the GSEs and investors’ efforts to protect both vulnerable homeowners and the credit markets from potentially destabilizing and widespread declines in property values in high-risk areas of the county. As new climate risk measurement practices become increasingly required by regulators and other stakeholders, ICE stands at the forefront of practical data solutions for markets.