FHFA Strategic Plan Emphasizes Climate Change – Finance and Banking

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On February 9, 2022, the United States Federal Housing Finance Agency (“FHFA”) released its draft FHFA Strategic Plan: Fiscal Years 2022-2026 (the “2022 Strategic Plan”) for public comment.

This year, FHFA added a new objective to this plan: to identify options for integrating 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. Although not a legal requirement, FHFA uses its strategic planning process to prioritize based on significant stakeholder input. Generally, the FHFA publishes a strategic plan every few years, outlining the agency’s priorities for the supervision and regulation of the Federal Home Loan Banks and Fannie Mae and Freddie Mac (the “Companies”). The agency articulates these priorities through strategic goals and objectives to achieve these goals.

The 2022 strategic plan appears to supersede the FHFA’s released as recently as 2021. The draft 2022 strategic plan differs from the 2021 strategic plan in some important respects. A key change is climate change.

The draft 2022 strategic plan addresses climate change in objective number 1.4: “Identify options for integrating climate change into the governance of regulated entities”. The 2022 Strategic Plan indicates that FHFA will achieve this goal by conducting research on the risks and effects of climate change on the housing finance system, drawing on experiences in responding to natural disasters to ensure prioritization of change. to FHFA and regulated entities, and improving collection, analysis and reporting of climate data. The 2021 Strategic Plan did not include a climate change target, or did not mention climate change at all.

Prioritizing climate change, among other aspects of the overall draft strategic plan, may reflect the change in administration at FHFA. The previous administration was very focused on the recapitalization of companies and their removal from trusteeship. For example, Objective 1.3 of the 2021 Strategic Plan was to responsibly ending guardianships companies. On the other hand, objective 1.3 of the 2022 strategic plan is to preserve and retain the company’s assets while manage guardianship.

While the FHFA prioritizes climate change, the 2022 strategic plan only really commits to studying the effects of climate change. The Plan and its goals do not shed light on whether and how the FHFA or the Companies will address the risks that climate change could pose to the US housing finance system. It remains unclear what action the FHFA will take, if any. Any action FHFA takes should be consistent with the agency’s and the companies’ 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 goal of studying climate change, the FHFA has recognized that climate change could shock the financial system in the future. Specifically to businesses, the FHFA noted that natural disasters could increase their credit risk and credit-related expenses, and otherwise stress businesses or their key business counterparties, including mortgage servicers and insurers. The FHFA pointed out that natural disasters tend to disproportionately affect affordable housing. Rebuilding such housing can be very difficult if economic conditions result in high labor and material costs.

Adding a climate change target also signals that companies, mortgage managers and insurers can at least partially bear some of the risk from climate change. One of the strategic goals of the Strategic Plan 2022 is to foster housing finance markets that promote equitable access to affordable and sustainable housing. (In a follow-up article, we’ll discuss these fair housing goals in more detail.) Although the FHFA has acknowledged that natural disasters tend to disproportionately affect affordable housing, the agency has not indicated whether or how it will deal with these related risks.

Prioritizing climate change is consistent with FHFA’s prior actions over the past two years. Recently, the FHFA added climate risk resilience as one of its assessment criteria in its 2022 scorecard for businesses, which we covered in a previous blog post.

The FHFA expects to finalize its 2022 Strategic Plan in the near future, with the draft comment period ending March 11, 2022. The FHFA generally also outlines its strategic goals and objectives in its annual performance plan for the upcoming fiscal year. The annual performance plan generally describes more specific measures, means and strategies to achieve each objective described in the strategic plan, as well as means to validate and verify each objective. As a result, we may learn more details about FHFA’s plans related to climate change when the agency releases that plan later this year.

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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.

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