Banks are using Fannie Mae and Freddie Mac to mitigate risk from natural disaster, according to a paper from Amine Ouazad, a professor in the department of applied economics at HEC Montreal and Matthew Kahn, a professor at Johns Hopkins University. Ouazad and Kahn examined the behavior of mortgage lenders in areas hit by hurricanes between 2004 and 2012, each of which caused at least $1 billion in damages. They found that, after those hurricanes, lenders increased by almost 10% the share of those mortgages that they sold to Fannie Mae and Freddie Mac.
“We estimate whether lenders’ sales of mortgages with loan amounts right below the conforming loan limit increase significantly after a natural disaster that caused more than a billion dollar in damages,” said Ouazad and Kahn. “Results suggest a substantial increase in securitization activity in years following such a billion-dollar disaster. Such increase is larger in neighborhoods for which such a disaster is “new news”, i.e. does not have a long history of hurricanes.”
Ouzad told The New York Times that with between $60 billion to $100 billion in new mortgages issued for coastal homes each year, “we’re not talking about a small number.”
Ouazad said he hopes the new research opens a discussion about who bears the risks of climate change and about lending policies in danger zones. “Do we still want to have 30-year fixed mortgages in areas at risk of flooding?” Mr. Ouazad asked. “I’m not sure about that.”
“Freddie Mac takes a number of steps to manage our flood risk, including requiring flood insurance on properties located in Special Flood Hazard Areas as designated by FEMA,” Freddie Mac told DS News in a statement.
Meanwhile, Fannie Mae servicers have taken steps to improve their engagement and communication with borrowers who may be caught in the path of storms this hurricane season, according to Mike Hernandez, VP of Housing Access and Disaster Response and Rebuild at Fannie Mae.
Hernandez says most servicers will send notifications to remind borrowers who their servicers even before a natural disaster has impacted a certain community.“That’s tremendously helpful because you may not know if your servicer has changed. Just doing that in advance is tremendously helpful,” Hernandez said.