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Banks Consider Climate Change Risk for Home Loans

Housing Policy + Finance

Banks Consider Climate Change Risk for Home Loans

September 21, 2021
flooded home

Banks are starting to calculate their risk exposure to climate catastrophes, and this process can be called “underwaterwriting” or “blue-lining,” depending on whether you’re looking at it from the point of view of the bank or consumer respectively.

Underwaterwriting is a neologism that combines “underwriting” with “underwater.” It refers to the process of banks considering external climate data, including business analytics, climate science, catastrophe modeling and insurance modeling, when making loans and assessing a home’s value, according to Jesse Keenan, associate professor of real estate at Tulane University. His research found that smaller, more local community banks have a better understanding of local flooding risks than large banks, which helps them better understand risk and resilient investment strategies.

Blue-lining, on the other hand, is when banks or mortgage lenders draw lines of risk around certain neighborhoods and streets based on their susceptibility to flooding or other climate-related disasters. The term is meant to be reminiscent of redlining, a product of institutionalized racism that restricted loan availability to homeowners in minority-dominated neighborhoods. Some climate advocates feel that blue-lining is creating a new class of victims who have their climate risk determined by banks with little transparency.

“The direct comparison between redlining and blue-lining is that it’s targeting some of the same groups. Those who are most at risk with climate change and climate disasters are the same ones who have been struggling and advocating for their societal rights,” said Jasmine Sanders, executive director of Our Climate, a youth climate activist group.

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