What Fannie Mae is doing about climate risk's impact on mortgages

Climate risk can be tough to quantify, but doing so has grown in importance due to regulatory attention and increased difficulty obtaining property insurance coverage for it.

In response, Fannie Mae Chief Climate Officer Tim Judge is using his background in analytics and modeling to try to predict and address its impact on the government-sponsored enterprise's sizable mortgage portfolio. It's an important risk to manage for mortgage companies, homebuyers and taxpayers because Fannie buys a significant number of the loans made in the United States and is held in government conservatorship.

Judge has been working for almost two years on a long-term effort to assess the accuracy of internal and external data and modeling at Fannie. He identifies the largest risk as flooding but looks at many others that range from wildfires and the shift to renewable energy sources to derechos, a wind condition associated with thunderstorms.

Judge also has worked to stage community outreach efforts and surveys aimed at building consumer awareness about risks and sharing information about what they can do to make their homes more resilient. He has used multiple channels, including social media, to do this and also worked to ensure the distribution of information is in line with Fannie's equitable housing plan, which aims to reduce racial disparities in residential real estate. Read on to learn more about Judge, the evolution of his role at Fannie Mae, and the property risk that mortgage companies and borrowers face. The excerpts that follow have been edited for clarity.

How did you come to take this job? What drew you to it?

I have a background in risk management modeling. What brought me to the job is about three years ago, we were looking at the flood risk at Fannie Mae and management wanted to get a better understanding of what our exposures were there. I thought the consideration was broader than that, and that we needed to be more holistic in terms of thinking about what the overall climate impact is to Fannie Mae. I brought a proposal to the management team and they said we should be looking at this as a broader issue. We've built out our climate impact team over time. It's a really impactful and very challenging area. At this point, are there particular regulatory or other mandates that you are looking to fulfill ? I'd say it's mostly internally driven. We certainly have a scorecard with FHFA, and FHFA cares about climate items but most of my roadmap and where we're going is driven by our internal focus on it. We are mindful of the SEC proposed rulemaking on climate disclosure. Certainly, once that gets finalized, that will have a big impact on our roadmap as well.

My understanding is the equitable housing plans call for some examination of climate impacts?

We put in some of our efforts relative to climate in what we're doing relative to housing equity. What we have there is us raising awareness at the community level and bringing climate analytics to different communi

ties that may not have access to them otherwise. We are working with both Memphis and Baltimore to provide them with analytics on what those areas might look like now and in the future due to climate change. What's their exposure to heat? What's their exposure to flooding in the future? And we talk to them about what possible actions they can take.

I’ve heard some of the climate risk analytics are becoming less retrospective and a little more can be done in the way of projections. Is that true?

There are two different types of vendors modeling in this area. There are climate models, like Jupiter's, which are prospective. Firms like Jupiter and First Street are telling you what's going to happen in 2050 or 2100. Then there are catastrophic modeling firms who have been the ones that everybody's used to set insurance rates. It's interesting, one tells you what the statistical likelihood of a hurricane is next year. One tells you what the environment and the climate might look like in 30, 50 or 100 years.

One of our jobs is to take both those kinds of disciplines, put them together and figure out what's the best usage of both those types of disciplines in order to come up with how we should manage risk. Catastrophic firms are saying, okay, we can start to tell you what losses look like and damage looks like due to hurricanes in the future; and the climate firms are starting to say, we can tell you get more toward present day what your risk is. It's really an evolving space.