Housing Finance | Notes from Washington

Steven Abrahams, Brian Landy, CFA, Chris Helwig and Mary Beth Fisher, PhD | November 5, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

• Housing in the wrong place or of the wrong type may become more costly to finance under an approach just outlined by the Financial Stability Oversight Council; FSOC’s efforts to measure and model climate risk could eventually lead banks and government agencies that bear that risk to increase capital and raise pricing
• A Republican win in the Virginia governor race and other election results have dialed up pressure to finish negotiations on the administration’s proposed $1.75 trillion budget package, which stands to feed demand for affordable multifamily and single-family housing faster than it creates supply

Housing in certain places or of certain types may become more costly to finance under an approach just outlined by the Financial Stability Oversight Council; FSOC’s efforts to measure and model climate risk could eventually lead banks and government agencies that bear that risk to increase capital and raise pricing

After reviewing risk in the financial system from climate change—such as loans or insurance policies against property or businesses in flood, fire or tidal zones—FSOC is taking the first steps toward measuring and managing that risk. It’s Report on Climate-Related Financial Risk pushes regulators first to create standardized disclosures and then have regulated institutions make those disclosures. FSOC also wants regulators to review institutions’ climate risk management. Regulators will almost certainly want institutions eventually to hold more capital against measured climate risk or otherwise reprice to cover potential losses.

FSOC’s efforts may trigger opposition, although the approach may be less publicly visible than past government efforts. Political opposition has left the federal flood insurance program insolvent for years. After once co-sponsoring a 2012 bill to raise federal flood insurance premiums, Rep. Maxine Waters (D-CA) a year later worked to repeal her own bill after significant backlash. The FSOC effort, however, could end up working through a diffuse set of lenders and insurers that apply different prices to the same forms of climate risk.

In housing, the Federal Housing Finance Agency made the first move earlier this year with an RFI on climate and natural disaster risk at Fannie Mae, Freddie Mac and the FHLBanks. Housing in certain locations or energy inefficient housing could eventually face a higher cost of mortgage debt.

A higher cost of funds for housing subject to climate risk could lower the value of that housing or give rise to lenders that take a different view of the risk and specialize in niche lending.

A Republican win in the Virginia governor race and other election results have turned up pressure to conclude negotiations on the administration’s proposed $1.75 trillion budget package, which stands to feed demand for affordable multifamily and single-family housing faster than it creates supply

In the wake of election results, the White House has stopped refining details of its proposed $1.75 trillion budget package and started focusing on the final ‘asks’ from Sen. Joe Manchin (D-WV) and Sen. Kyrsten Sinema (D-AZ). The White House has brought the total spend closer to levels preferred by Manchin, dropped some climate provisions and is now prepared to push harder to get Manchin and Sinema both to closure. The chances the White House succeeds are now very high, according to our Washington sources. At the same time, pressure is building to peel off the infrastructure bill already approved by the Senate for a separate House vote, which would leave the budget package to stand on its own.

The White House proposal includes around $150 billion in grants and other outlays for housing, and around $18 billion in tax incentives. The administration’s initial $2.5 trillion proposed package envisioned more than $300 billion for housing, so the housing as a portion of the overall package is coming in a little lower. The proposal includes roughly $65 billion is for public housing, $25 billion for rental vouchers, more than $30 billion in grants for new construction or renovation, $18 billion for tax incentives for renovation and new production, $10 billion for down payment assistance, $5 billion for a subsidized 20-year loan product and $10 billion for community development in areas where crumbling infrastructure has created a headwind to creating new supply.

Despite the more than $60 billion put toward addressing the supply shortage, there is little reason to expect pricing at the affordable end of the market to ease any time soon. Rental vouchers should drive demand for smaller private multifamily properties and down payment assistance should drive demand for the more affordable end of the single-family market. More affordable supply will come out over time, but the timelines for building affordable housing are long.