March 21, 2022

FHFA’s Strategic Plan Adds Focus on Climate Change

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On February 9, 2022, the U.S. Federal Housing Finance Agency (“FHFA”) released its Draft FHFA Strategic Plan: Fiscal Years 2022-2026 (the “2022 Strategic Plan”) for public input.

This year, FHFA added a novel objective to this plan – to identify options for incorporating climate change into FHFA’s governance of the entities it regulates.

According to FHFA Acting Director Sandra L. Thompson, the 2022 Strategic Plan provides a roadmap for FHFA to promote sustainable and equitable access to mortgage credit and protect the safety and soundness of the U.S. housing system. While not a statutory requirement, the FHFA uses its strategic planning process to set priorities based on important stakeholder input. Typically, FHFA releases a strategic plan every few years, outlining the agency’s priorities for the supervision and regulation of the Federal Home Loan Banks, and of Fannie Mae and Freddie Mac (the “Enterprises”). The agency sets forth those priorities through strategic goals and objectives to achieve those goals.

The 2022 Strategic Plan appears to replace the one FHFA released as recently as 2021. The Draft 2022 Strategic Plan differs from the 2021 Strategic Plan in some significant respects. One key change is climate change.

The Draft 2022 Strategic Plan addresses climate change in objective number 1.4: “Identify options for incorporating climate change into regulated entity governance.” The 2022 Strategic Plan states that FHFA will achieve that objective by conducting research on the risks and effects of climate change on the housing finance system, building on experiences with natural disaster response to ensure prioritization of climate change at FHFA and the regulated entities, and improving climate data collection, analysis, and reporting. The 2021 Strategic Plan did not include a climate change objective, or mention climate change at all.

Prioritizing climate change, among other aspects of the Draft Strategic Plan in general, may reflect the shift in administration at FHFA. The prior administration was keenly focused on recapitalizing the Enterprises and removing them from conservatorship. For example, Objective 1.3 in the 2021 Strategic Plan was to responsibly end the conservatorships of the Enterprises. In contrast, Objective 1.3 in the 2022 Strategic Plan is to preserve and conserve Enterprise assets while managing the conservatorships.

While the FHFA is prioritizing climate change, the 2022 Strategic Plan really only commits to studying the effects of climate change. The Plan and its objectives do not shed light on whether and how FHFA or the Enterprises will address the risks climate change may pose to the U.S. housing finance system. It is still unclear what actions FHFA will take , if any. Any action FHFA does take would need to be consistent with the agency’s and Enterprises’ statutory mandates — to provide stability to the secondary mortgage market, provide ongoing assistance to that market, and promote access to mortgage credit.

In addition to its objective to study climate change, FHFA acknowledged that climate change may shock the financial system in the future. Specific to the Enterprises, FHFA noted that natural disasters could increase their credit risk and credit-related expenses, and otherwise stress the Enterprises or their key business counterparties, including mortgage servicers and insurers. FHFA highlighted that natural disasters tend to disproportionately affect affordable housing. Rebuilding such housing may be significantly difficult if economic conditions result in high labor and materials costs.

The addition of a climate change objective also signals that the Enterprises, mortgage servicers, and insurers may at least partially bear some of the risk from climate change. One of the strategic goals in the 2022 Strategic Plan is to foster housing finance markets that promote equitable access to affordable and sustainable housing. (In a follow-up post, we will address those equitable housing goals in greater detail.) Although FHFA recognized that natural disasters tend to disproportionally affect affordable housing, the agency did not indicate whether or how it will address those related risks.

Prioritizing climate change is consistent with FHFA’s prior actions over the past two years. Recently, FHFA added resiliency to climate risk as one of its assessment criteria in its 2022 Scorecard for the Enterprises, which we addressed in a prior blog post.

The FHFA expects to finalize its 2022 Strategic Plan in the near future, with the draft comment period ending on March 11, 2022. Typically, the FHFA also outlines its strategic goals and objectives in its Annual Performance Plan for the next fiscal year. The Annual Performance Plan usually outlines more specific measures, means, and strategies to accomplish each objective outlined in the Strategic Plan, as well as ways to validate and verify each objective. Accordingly, we may learn more details on FHFA’s plans related to climate change when the agency releases that plan later this year.

The post FHFA’s Strategic Plan Adds Focus on Climate Change appeared first on Eye on ESG.

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