FHFA's Strategic Plan Adds Focus On Climate Change – Finance and Banking – United States – Mondaq News Alerts

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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
“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
 of the Enterprises. In contrast,
Objective 1.3 in the 2022 Strategic Plan is to preserve and
conserve Enterprise assets while managing the

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
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.

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