Incorporating Climate Data into Collateral Valuation

Our forward-thinking valuation company is at the forefront of efforts to get the necessary data and analytics to measure how climate risk impacts collateral values. Once we have acquired a portfolio, we assess it to identify which properties are at greatest risk.

We also contemplate how to work with lenders to mitigate these risks.

The time has come for mortgage lenders to start paying attention to climate risk.

Until recently, mortgage lenders felt that they were largely insulated from climate risk. Notwithstanding the inherent risk natural hazard events pose to housing and the anticipated increased frequency of these events due to climate change, it seemed safe to assume that property insurers and other parties in higher loss position were bearing those risks.

In reality, these risks are often underinsured. And even in cases where property insurance is adequate, the fallout has the potential to hit investor cash flows in a variety of ways. Acute climate events like hurricanes create short-term delinquency and prepayment spikes in affected areas. Chronic risks such as sea level rise and increased wildfire risk can depress housing values in areas most susceptible to these events. Potential impacts to property insurance costs, utility costs (water and electricity in areas prone to excessive heat and drought, for example) and property taxes used to fund climate-mitigating infrastructure projects all contribute to uncertainty in loan and MSR modeling.

Moreover, dismissing climate risk should be antithetical to any lender claiming to espouse ESG principles. After all, consider who is almost always in the first loan position – the borrower. Any mortgage lending strategy purporting to be ESG friendly must necessarily take borrower welfare into account. Dismissing climate risk because borrowers will bear most of the impact is hardly a socially responsible mindset.

Hazard and physical insurers typically occupy the loss positions between borrowers and investors. Few tears are shed when insurers absorb losses. But society at large ultimately pays the price when losses invariably lead to higher premiums for everybody.   

How we help lenders evaluate exposure to Climate Risk

For mortgage financiers and lenders, we help you answer some of these questions:

1. What percentage of the loans in your portfolio are susceptible to flood risk?
2. How geographically concentrated is your portfolio? What percentage of you portfolio is at risk of being adversely impacted by just one or two extreme events?
3. What would the true valuation of your portfolio be if climate risk were factored into the modeling?
4. To what extent will you be required to disclose the extent to which your portfolio is exposed to climate risk?