April 22, 2024

Housing Finance Development

It's Your Housing Finance Development

Jumbo-Sized Financial Risk With a Side of Climate Change

A Conversation with Pete Carroll

When it comes to climate change, the narrative often focuses on how weather patterns will affect individuals and not necessarily the property market. However, recent events such as Hurricane Ian are reminders of the devastating consequences that supersized storms can have on life and property.

To prepare for the intensifying impacts of climate change and the resulting physical risks to assets, publicly traded securities, private investments and companies, the Biden administration is asking regulators to examine and recommend policies that support both the environment as well as the country’s bottom line.

In this episode, host Maiclaire Bolton Smith sits down with CoreLogic’s Public Policy and Industry Relations Executive Pete Carroll to discuss how climate-related financial risk influences government policy, with focus on President Biden’s Executive Order 14030.

Read more about the Dodd-Frank Act here, and check out the following episodes for further discussions about the effects of climate change on the property market:

Maiclaire Bolton Smith:

Welcome back to Core Conversation: A CoreLogic Podcast, where we dive into the heart of what makes the property market tick. I’m Maiclaire Bolton Smith, your host and curious observer of all things related to property — from affordable housing to market trends and the impacts of natural disasters to climate change — I want to converse about it all.

Climate change. That last one is something we’ve discussed quite frequently on this podcast, so we’re going to dive in with a little bit of a different perspective today. The changing climate is influencing change far and wide. Nature is requiring our government to alter its policies, and that affects us all. President Biden has responded to the threat of a changing climate by issuing an executive order on climate-related financial risk.

However, in the U.S., lawmakers do not just haphazardly enact legislation. Instead, they lean on the U.S. federal agencies to step in and offer a wide range of policy recommendations that support both the environment as well as the bottom line of this country. The balance can be a tenuous one. In the property industry alone, there are consumer regulators, housing regulators, federally-backed mortgage lending programs, market regulators and prudential regulators, just to name some high-level players.

To explore how climate-focused policies can affect the federal budget and what that means for those working in the property industry, we are joined once again by CoreLogic’s Public Policy and Industry Relations Executive Pete Carroll. Pete, welcome back to Core Conversations!

Pete Carroll:

Hi, Maiclaire, I’m really happy to be back. Thanks for having me.

MBS:

Okay, I think this is your fifth time on the podcast. You are our most-featured guest officially, but it’s been a while since you’ve been here. So, before we dive into our discussion, can you just remind our listeners a little bit about who you are, your role here at CoreLogic and anything fun you want to tell us about yourself?

PC:

I would love to. So my title at CoreLogic is Executive of Public Policy and Industry Relations, which means I do a bunch of things at the company. But some of my major responsibilities include — I lead our Government Relations Team, which is leading a team that focuses on public policy; legislative developments happening in Washington, D.C. and at the state and local level; and how those policy activities may affect CoreLogic or our clients. And I also maintain all of our relationships with our industry trade association partners, consumer advocacy partners, think tanks, academic institutions and other policymakers in Washington, D.C., with whom we engage regularly on these policy matters. In addition, I also lead certain ESG initiatives for the company. One, in particular, I’ve been leading that our CEO, Pat Dodd, refers to as Data Science for Good.

MBS:

Ok, I’m going to jump in quickly here and just define that acronym, ESG means environmental, social and corporate governance, correct?

PC:

Yeah, in fact in a past podcast, Maiclaire, I described an innovative partnership that we’ve developed with the Mortgage Bankers Association, in partnership with the state housing finance agencies of Tennessee and Ohio, where we’ve built out a grassroots coalition of affordable home ownership stakeholders with the goal of using evidence-based research and design principles to help speed up the master planning process, for local non-profit homebuilders who are trying to build single-family, entry-level homes. So, affordable entry-level, single-family homes for low- to moderate-income families and low- to moderate-income communities. And then finally, among other things I ran related to this discussion today, I lead outreach efforts in Washington, D.C. with the federal regulatory community to offer them insights into the state-of-the-art of models, data and other analytics that can help them gauge climate-related financial risks in response to the executive order from President Biden that you referenced earlier.

MBS:

Yeah, and that exactly is why we want to talk with you today, Pete. So, today we’re going to specifically focus on Executive Order 14030. So, can you give us a little background on exactly what that is, a synopsis of the climate-related policy declaration that we’re going to be talking about today?

PC:

Absolutely. So, the Biden administration clearly feels that climate risk is a growing threat to the financial stability of the economy, including our housing markets, which, of course, triggered the 2008 financial crisis.

MBS:

Yeah.

PC:

And Biden administration views the intensifying impacts of climate change as presenting what they refer to as physical risks to assets, publicly traded securities, private investments and companies. That’s a term that’s worth pausing on. Physical risk is a term for how current and evolving changes to climate are affecting the risks of damages to real property and other infrastructure. And to the extent that that real property and infrastructure underlies financial instruments in the capital markets, there’s obviously a knock-on consequence there.

MBS:

Yeah.

PC:

Of course, damages to real property and infrastructure, if not adequately insured, can drive financial losses. And those losses can include economic capital reserves for financial institutions, and so that’s the linkage between climate risk and how we can start to see the risk of impacts to financial stability in the economy.

MBS:

Yeah, that’s really interesting. I’m glad we can make that tie too because I think for a lot of people they’re like, “I don’t know how these two things could be related.” So, yeah, keep going.

PC:

No, super. So there’s a big push in the executive order for the what’s called FSOC agencies, the Financial Stability Oversight Committee (Council) that was created as part of the Dodd-Frank Act last decade.

MBS:

Okay.

PC:

So, federal regulatory agencies, but it includes consumer regulators such as the Consumer Financial Protection Bureau; housing regulators such as the Department of Housing and Urban Development; and the Federal Housing Finance Agency that oversees Fannie Mae, Freddie Mac and the Federal Home Loan Bank system; the prudential regulatory community, which includes the Federal Reserve Board of Governors, the Treasury Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association. So, those are the four regulators that from a prudential market stability, safety and sound standpoint, oversee banks. The federally-backed mortgage lending programs themselves, including the HUD programs, FHA, VA, USDA and Ginnie Mae. Then, of course, Fannie Mae, Freddie Mac and the federal home loan banks and market regulators, which includes Treasury in the Office of Financial Research, Security Exchange Commission and CFTC, or the Commodities Futures Trading Commission. So, a lot of regulators compose FSOC, who are responsible for responding to the Biden executive order with a range of policy considerations.

MBS:

So, I guess we talk about these policy considerations. Have we seen any policy recommendations yet coming from federal agencies, and what does that mean for our industry?

PC:

Yeah, so there are really two parts here. There’s what I would describe as the policies that were articulated by the FSOC agencies and the FSOC response to the executive order. So the FSOC agencies got together and wrote a very thoughtful response to the executive order that outlined a whole variety of policy prescriptions that they, in the paper, indicate they’re going to be pursuing. And then there’s the current state of affairs with how far they’ve gotten with some of that work. In terms of laying out the spectrum of policy prescriptions that were outlined in the FSOC response, I would say, you could think of it as a kind of spectrum or continuum that spans across policy prescriptions that apply to consumers, homeowners and municipalities, moving towards commercial banks and independent mortgage lenders and servicers.

MBS:

Okay.

PC:

And then moving towards investors or guarantors in mortgage-related or other financial instruments that are implicated by real property and infrastructure.

MBS:

Okay.

PC:

So, those policies include things that you would traditionally think of as they relate to credit risk management. So, from the consumer-homeowner standpoint, it includes homeowner risk assessments, so research that tries to ascertain what is the risk of current and future climate change.

MBS:

Right, yeah.

PC:

Current natural hazard risk, future climate change on homeowners from a variety of standpoints: how it’s disproportionately affecting low- to moderate-income communities, how it’s affecting the potential home equity of all Americans. And then moving through to disclosures that are targeted to the homeowner that helps the homeowner get their own heads around what the natural disaster or climate risk looks like, this physical risk looks like to the homeowner who might be buying a home, then through to what we would consider the traditional credit risk disciplines. And that would include things like a bank or a mortgage investor doing what we would describe as a climate audit, where they would try to look at their existing portfolio and identify, “Hey, here’s how climate risk, both current climate risk and future climate risk, could be affecting the value of our portfolio over time, or our levels of economic capital over time.”

MBS:

Yeah.

PC:

And that could be done through a baseline assessment, that could be done through risk stress testing assessment. And then there’s just the practice, the policies and procedures of how mortgage lenders and investors go about underwriting and pricing mortgage loans or other related financial instruments and how they might factor this evolving climate-related financial risk, physical risk environment into how they go about underwriting and pricing mortgage loans and ascertaining what the risk is to all of their counterparties. So, if I’m a, for example, mortgage lender, I have a servicer who might be servicing my loans, I have an investor who might be purchasing my loans, an insurance company that’s providing insurance on my loans. These are called counterparties, right?

MBS:

Yeah, yeah.

PC:

So how is all this climate risk affecting all my partners in the value chain, so to speak?

MBS:

Right.

PC:

And then, of course, the last would be in disclosures to investors. So, how is climate-related financial risk posing material financial risks to end investors and regular companies and financial-related companies, both from a carbon emission standpoint and from a physical risk, climate-related financial risk standpoint? So a big, wide spectrum in that response of potential activities.

MBS:

Well, it also shows how everything is connected too in the industry, across the property industry and all the different components that go into finding, buying and selling and insuring your home, and how all of this really is connected. And so it really hits all of the different facets of what we do at CoreLogic. So that’s really interesting about this. But I guess too, just because a policy is recommended, it doesn’t mean it’ll be pursued, right? It just means it’s a recommendation. So, can we talk a little bit about of those recommendations, the ones that we think might pass and go to a proposal stage and head towards implementation, or do we think they’ll just stay as recommendations?

PC:

This is exactly the type of topic we need to be focused on right now. We have a partner, a wonderful partner called Ceres or one of the leading non-profits focused on climate-related financial risk among many other climate issues. They maintain a really fabulous resource called the Ceres Accelerator for Sustainable Capital Markets.

MBS:

Okay.

PC:

It’s a scorecard of sorts that has mapped out for all of these agencies that I rattled off, and various elements of the FSOC response, what the state of their action has been on the items in the FSOC response.

MBS:

Okay.

PC:

And there has been action. So it’s important to give credit where credit is due. Even by the Ceres, so taking that Ceres scorecard and layering on some CoreLogic-specific knowledge, all of these agencies have affirmed climate as a systemic risk, which is a pretty important step. Most have appointed senior staff to focus on climate change and the financial risks therein, the physical risk profiles that we discussed. The Federal Reserve Board of Governors, the SEC, the CFTC and Treasury have all produced research and data series on climate change and climate-related financial risk, which is an important start. And then there’s been other bespoke initiatives that we’ve started to see emerge. For example, the Federal Housing Finance Agency (FHFA) has assessed climate risk on financially vulnerable communities.

MBS:

Yeah.

PC:

I know the Consumer Financial Protection Bureau has started to do the same. And the Securities and Exchange Commission has issued a notice of proposed rulemaking that’s in process that seeks to improve climate-related disclosures and also consider climate risk in their supervisor and regulatory processes. So this is just the start. And so what I would say is you see, there’s this emerging body of work that’s beginning, but the theme that you can see that’s running across all of them, which is prudent, is that it begins with good empirical analysis. That’s what’s key. And that’s important. I mean, it’s important to keep in mind that it’s one thing to assess the current state of natural hazard risk to real property infrastructure, it’s another to assess what future climate risk can do, right?

MBS:

Absolutely, yeah.

PC:

There’s a standards body that is internationally recognized called the Intergovernmental Panel on Climate Change, the IPCC.

MBS:

Yeah.

PC:

They’ve got the state-of-the art in science on what future carbon emissions patterns may look like, and how that could translate to climate change. And by extension, how that could translate to increasing frequency and severity of climate-related events. And even the IPCC splits those projections into what they call four representative concentration pathways, or RPCs, that represent varying levels of severity in climate change, resulting from varying levels of carbon emissions over time. And so it’s just to say that if you’re a regulator and you’re trying to figure out, “Okay, what is the current profile of physical risk, natural hazard risk look like to companies exposed to uninsured physical risks or to property and infrastructure?” That’s one thing. It’s another thing to think about what does that future risk look like given that there are varying pathways that are hard to predict at this point in time? I mean, the science is getting very good at saying, “If it’s one of these pathways, you can rest assured this is what it’s going to look like.”

But if you’re in the business of trying to assess how that could affect the level of economic capital at a bank, that’s a tricky proposition.

MBS:

Sure, yeah. There are so many unknowns, yeah.

PC:

Which is just to say, it’s very, very prudent for these agencies to move very cautiously, to do their homework. And that’s what we’re seeing. We’re seeing a lot of work to aggregate the data. I mean, for example, I mean, CoreLogic can say firsthand that every single one of these agencies has put out requests for information, both on soliciting public feedback on what is the state-of-the-art with respect to climate models and data to assess climate-related financial risk, as well as soliciting input on — for their agencies — which of these policy prescriptions have merit, or just what the public thinks about them in general.

MBS:

Right.

PC:

And that’s textbook. That’s exactly the type of first step one would expect and it’s prudent, and hopefully it’s going to lead to some good things.

MBS:

And that actually leads to a thought — is there a timeline on this executive order of when all of this needs to be enacted or…

PC:

So, that’s a good question. There was definitely a timeline on the response, to which the FSOC agencies responded. But in terms of the actual policy initiatives, I don’t believe so.

MBS:

Okay.

PC:

I have to presume, and this is just my opinion precisely for the reasons that I just rattled off, that it’s because it’s so tricky.

MBS:

Right.

PC:

It’s hard to put a hard deadline on that because you have to go through the prudent steps. So I think it’s a little bit of a… I think this is probably what the various offices and the White House and Treasury do, is they convene the FSOC agencies and they get a beat on what the status is of these efforts and they try to figure out what the progress looks like, is my sense. But what I would say is, we’ve seen a lot of activity over the course of this year in particular, probably going through the remainder of this year, just in terms of procuring the right models and data that are needed to do the underlying evidence-based research that you would want to do before moving forward with the policy initiative, or notice a proposed rulemaking or something to that effect.

MBS:

Sure.

PC:

So, that’s where we’re at right now and that’s entirely. ..So that’s in terms of timeline, I would expect this year, procuring the right data models and analytics to do the research that needs to be done, with a lot of that research getting done this year and into next year. And then perhaps we could see somewhere in maybe Q2 or Q3 next year, some more notice of proposed rulemakings come out akin to the one we saw from the SEC with the climate disclosures.

MBS:

Okay. And on that topic of taking action for the future, just to finish off, we know more or less what’s coming. What can professionals in the property industry do to prepare themselves for these changes that are coming?

PC:

So there’s so much that can be done, and in fact, we are working with so many mortgage servicers and investors and insurers who are already moving. So they’re not waiting on other regulators to tell them what to do. They recognize current natural hazard risk at a minimum. So just even just based on historical data, just doing a current baseline assessment of what the natural hazard risk looks like to the properties underlying their mortgage, their mortgage loans. They’re not waiting, they’re going ahead and assessing that risk today.

MBS:

Right, yeah.

PC:

And we’re seeing them do that in a variety of ways. And one of the most common ways is what we call a concentration risk, which is, let’s say, I’m an investor and I own a large pool of either mortgage-backed securities or whole mortgage loans that sit on my portfolio, or some combination. Chances are, I have a number of mortgage servicing companies who are collecting payments on my behalf. A very common project pattern we have seen is where these mortgage lenders or investors actually start to chart out, they take the full book of business across all of these servicers, and they run our CoreLogic natural hazard risk composite scores, where we are able to actually assign a risk score based on the top 7 natural hazards, everything flood-driven, wildfire, convective storm, you name it. We’re able to blend that into a single score, which we can then translate into a probability of damage and an associated probability of uninsured reconstruction costs.

And that’s very valuable because that helps them get a handle on — hey, because this is at the property level, based on all the properties that are in my book, scattered across all these mortgage servicers, which mortgage servicers have a book of loans that they’re servicing that have a lower risk of economic loss, or some level of damages resulting from a natural hazard vis-à-vis the other? And that’s it, what that ends up giving them is this good dashboard of, “Hey, I’ve got some servicers that have a greater concentration of this risk than others.” And that gives them the insight to be able to rebalance that portfolio to maybe move some loans from one servicer to another so they can smooth out that risk profile across their servicers. And that’s just one example of how we’re seeing the industry respond to this emerging risk pattern, and it’s interesting to see.

MBS:

Yeah and such a great tie back to a recent episode that we did as well too with George Gallagher where we talked, he talked a lot more about the composite risk scores and how they were used, so great at tying everything together.

PC:

He is way better than I am at explaining that. So definitely link to that podcast for that insight.

MBS:

Yes. Well, the two of you together are a dynamic duo so… Thrilled to have had you here again today, Pete. Thank you so much for joining me once again on Core Conversations: A Core Logic podcast.

PC:

Oh, thanks so much for having me. I really enjoyed it.

MBS:

And thanks to the team for helping bring this podcast to life, producer Jessi Devenyns, editor and sound engineer, Romie Aromin, and social media duo, Sarah Buck and Makaila Brooks. Join us next time for another Core Conversation.

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