Mortgage giant Fannie Mae is urging FEMA to set federal standards for how home sellers disclose flood risks to potential buyers.
The news: The recommendation Fannie Mae made to FEMA would shine a light on potential damages homeowners would face from climate change, which has contributed to rising sea levels, stronger storm surges and heavier rainfalls that increase flooding. The government-controlled Fannie Mae buys mortgages from lenders and sells them as securities to investors. FEMA operates the National Flood Insurance Program.
Only a handful of states currently require sellers to tell buyers whether their home has incurred flooding in the past or if it exists in a flood zone. Climate advocates have pushed for all states to ensure sellers convey that information, arguing that failing to do so distorts property values and leaves buyers exposed to flood-related damages not covered by home insurance.
“Under the current residential real estate disclosure landscape, which varies from state to state, potential homebuyers rarely receive information related to flooding and flood risk during the home buying process,” Timothy Judge, chief climate officer for Fannie Mae, wrote in the comment. “As a result, many homebuyers are unaware of whether their potential home has been flooded before, leaving them potentially exposed to future flooding events and making it less likely for them to proactively adopt flood mitigation measures.”
The details: Fannie Mae made the comments in a Jan. 11 filing for the National Flood Insurance Program’s floodplain management standards for land management and use. Fannie Mae and Freddie Mac, the other big government-controlled housing finance company, guarantee about half of the U.S. mortgage market.
Fannie Mae noted 28 states “have minimal or no laws mandating” flood risk disclosure and urged FEMA to create a “national flood risk reporting standard” to aid prospective homebuyers. It suggested that information would limit future taxpayer losses by encouraging buyers to “self-select” away from repeatedly flooded homes.
“First, we recommend that FEMA establish standardized flood risk disclosures and promulgate regulations requiring their use in various contexts,” Judge said. “These flood-related disclosures, if required as part of the disclosure package for the sale of residential real property, would equip potential buyers with the information needed to make an informed decision regarding the flood risk associated with their new home.”
Fannie Mae said potentially relevant disclosure could cover “a property’s current flood zone designation, past property flooding events, and current flood insurance coverage on the home.”
Context: The comments come as FEMA puts new flood insurance rates into motion and as the Federal Housing Finance Agency, which oversees Fannie Mae, weighs how climate change affects the mortgage market.
FEMA’s flood insurance update, known as Risk Rating 2.0, is designed to account for more property-specific flood risk information. But some lawmakers have pushed FEMA to delay the new system, fearing premium increases for homeowners. It began to go into effect last year for new insurance policies and is set to launch for renewing policies in April.
Risk Rating 2.0 moves away from a model that conveys risks based on whether a home is located in a specified flood zone. Floodplain managers, spending watchdogs and climate experts have criticized that system for failing to account for future climate change and relying on outdated maps.
Fannie Mae, meanwhile, has wrestled with how much climate-related risk it holds in its portfolio. It has pointed to flood insurance as a first line of defense for losses.
“[W]e believe FEMA making more climate-related information readily available will assist consumers, and others, in making educated decisions around climate-related risk mitigation and resilience measures,” Judge said in Fannie Mae’s comment letter.