Mortgage Lenders Are Shifting Climate Risks Onto Taxpayers, Study Finds

The Mortgage Bankers Association, which represents mortgage lenders, declined to comment. The Federal Housing Finance Agency, which sets the rules governing the behavior of Fannie and Freddie, did not respond to a request for comment.

Fannie Mae and Freddie Mac declined to comment on the paper or to describe what share of the mortgages they hold are for homes in flood zones.

Housing economists who were not involved in the research said that the methodology used by Mr. Ouazad and Mr. Kahn was sound, and that their findings would raise troubling questions about who will bear the financial cost of climate change in the United States.

“The problem they’ve discovered is likely to grow in magnitude and is clearly important, because the taxpayer is on the hook,” Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, said. The mortgage market’s exposure to flooding “could be as large as the losses due to the subprime crisis,” Ms. Wachter said, referring to the 2008 housing crisis, which threw the nation into its worst economic downturn since the 1930s.

The paper’s findings suggest that banks and other lenders are aware of that threat, she added. “They see this coming,” Ms. Wachter said. “And they’re taking steps to shift the risk.”

Asaf Bernstein, an economist at the University of Colorado in Boulder, said the findings highlighted another problem: By agreeing to buy mortgages for homes at risk from climate change, without charging a premium that reflects that risk, the federal government had effectively encouraged home construction and purchases in vulnerable areas.

“It’s basically an implicit subsidy,” Mr. Bernstein, who was not involved in the study, said.

Economists at both Fannie and Freddie have warned in the past of the risks that climate-related increases in flooding pose to the mortgage industry. In 2016, Sean Becketti, then the chief economist at Freddie Mac, wrote that rising seas “appear likely to destroy billions of dollars in property.”