TLDR There is an enormous amount of unpriced risk between GSE securities and potential insurance liabilities everyone is attempting to ignore.
https://www.nytimes.com/2024/12/07/business/economy/mortgage... | https://archive.today/wVcoy
> Mortgage Regulators Are Shrugging Off Climate Risk. It Could Cost Taxpayers Billions.
> Fannie Mae and Freddie Mac, which backstop most U.S. mortgages, know floods and fires are a growing problem. But little action has been taken.
https://www.richmondfed.org/publications/research/economic_b...
> The increasing frequency and intensity of extreme weather events present potential risks to real estate finance. It has been argued that mortgage lenders may be able to securitize and sell mortgages that are more exposed to risks of flooding to government-sponsored enterprises (GSEs). This possibility arises from two factors: the limited spatial variation in GSE guarantee fees (e.g., the fees are similar between houses with different flood risks) and the fact that GSE insurance mandates rely on outdated floodplain maps (which may fail to account for predicted increases in flood risks over the next 30 years). If this is the case, then there may be a concentration of flood risks at the GSEs, which play an important role in guaranteeing the stability of the mortgage market.
> However, the flood risk exposure of the portfolios of mortgages backed (purchased or guaranteed) by GSEs — specifically Fannie Mae and Freddie Mac — remains unknown. This article summarizes my examination of projected flood-risk exposures and the actual impacts of Hurricane Irma on mortgage defaults, documented in detail in my recent working paper "Leveraging the Disagreement on Climate Change: Theory and Evidence," co-authored with Laura Bakkensen and Russell Wong.
> Our first finding focuses on the GSE exposure to future flood risks. Restricting our attention to mortgages outstanding in 2023, the following table summarizes GSE portfolio exposure to future flood risk. We estimate that more than a quarter of outstanding mortgages — or more than 23 million loans, with a total outstanding balance of more than $2 trillion dollars — are at risk of future flooding, defined in this subsection as lying in a ZIP code with an average flood factor of at least 2.5 A smaller fraction (nearly 6 percent) are at higher risk, defined as lying in a ZIP code with an average flood factor of at least 3.
https://www.newyorkfed.org/medialibrary/media/research/confe...
> Conclusion:
> Mis-calibrated GSE insurance requirements → growth of fragile insurers.
> GSEs bear large unpriced exposure to climate due to insurance risk → taxpayer externality.
> Too much GSE mortgage origination in risky areas → distorted credit supply.
tl;dr - When insurers pull out, Florida creates some new insurers, rubber stamps them as financially solvent (even though they're not), these new entities insure properties, and then banks can originate new mortgages (because the properties are insurable) before rapidly transferring them to Fannie/Freddie (as they're secretly trash, but compliant). End result if properties are flooded, demolished, or burned? Insurers go bust and leave Fannie/Freddie holding the bag (the mortgage, now with no property securing it).
