Fitch Ratings will include natural disaster risks into its ratings of residential mortgage-backed securities, a sign that the industry is beginning to acknowledge the financial risks of climate change.
Fitch is the first of the three major U.S. credit ratings agencies to consider environmental risk for RMBS, which are securities backed by the interest paid on residential mortgages. The change adds a new penalty to existing risk metrics that look at more conventional finance risks.
The inclusion of natural disasters is designed to make investors more aware that certain mortgage pools that could be exposed to natural disasters, according to Reuters. In particular, those pools with high concentrations of mortgages are in Florida and California.
The announcement comes after damages from natural disasters pile up. Over the past two years, Hurricanes Florence and Michael resulted in a combined $49 billion in damages, according to the National Oceanic and Atmospheric Administration, Reuters reported. In California, wildfires last year cost $24 billion, a record figure.
The new measure will apply to ratings that have already been issued. That means Fitch does not expect it to affect any of its ratings currently outstanding, according to Reuters.
The impacts of natural disasters and climate change are increasingly impacting the way real estate investors make decisions. In South Florida, many property insurers have left the market because of the risks of hurricanes.
[Reuters] — Keith Larsen