Flood cautions audience to “see through the noise and beyond the bluster”
At PRISM 2024, Mike Flood, Senior Vice President, Commercial/Multifamily Policy, and Member Engagement at the Mortgage Bankers Association, delivered an insightful speech titled “Inside the Beltway,” to help the audience understand how current events in Washington, D.C. impacts their business. At its core, Flood’s theme was: “See through the noise and beyond the bluster” to focus on what is happening or likely to happen. His fast-paced analysis delved into the fate of maturing loans, the transformational impact of rising insurance costs on lending decisions, climate risk/ESG standards, and of course, the upcoming Presidential election.
Three Key Developments That Will Affect Your Business
Flood brought to the surface three market developments that have implications for commercial real estate (CRE) lending:
- HUD Final Rule: Property Standards for Flood Hazard Exposure
The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule adopting property standards for flood hazard exposure, floodplain management, and protection of wetlands. Effective April 22, 2024, this rule aims to enhance the resilience of HUD-assisted or financed projects against climate change and natural disasters. “Property loans going forward at HUD will now have to be compliant with 100-year—and sometimes 500-year—floodplain protocols so think about what that might mean to your business if you’re doing a HUD loan,” Flood advised. The rule integrates the Federal Flood Risk Management Standard (FFRMS), promoting a climate-informed science approach for determining floodplain extents.
- HUD and USDA Final Rule: Adoption of Energy Efficiency Standards
A recent joint HUD and USDA final rule updated energy efficiency standards for new multifamily housing construction. This rule adopts the latest 2021 International Energy Conservation Code (IECC) for single-family and low-rise buildings and ASHRAE 90.1-2019 standards for multifamily buildings. Flood pointed out, “These updates not only reduce energy bills for low- and moderate-income households but also significantly cut carbon emissions, contributing to better health outcomes and long-term affordability.” Notably, he emphasized that “these energy efficiency standards are the highest in the country and go beyond what any state has put into effect. What HUD is saying is ‘if we’re going to produce affordable housing, we’re going to make sure it’s sustainable.’” The implication is that if the GSEs follow HUD’s lead and adopt the same policies, that means 50% of all multifamily financing by the GSEs (government-sponsored enterprise), plus the 10% at HUD, would require compliance and reporting of energy efficiency performance.
- Increasing Cost and Decreasing Availability of Property Insurance
Flood acknowledged the rising costs and decreasing availability of property insurance, remarking that “increasing insurance premiums are a direct consequence of heightened climate risks, prompting lenders to adopt dynamic scoring models more extensively.” He noted that these models are crucial for making informed lending decisions in a landscape where insurance costs are becoming a significant factor. Flood predicted that “Insurance will continue to be expensive, and lenders are now finding that the price is enough under today’s high interest rate environment that it’s affecting deals.”
Developments on the Near-Term Horizon Worth Watching
Beyond recent federal actions, Flood highlighted three emerging developments still taking shape:
- California Climate Change Lawsuit
The SEC proposed a comprehensive ESG rule that would have required lenders who originate loans on a green or LEED-certified building to submit annual reports on energy efficiency. The SEC later took the reporting requirement out of the rule due to concerns of lawsuits. California, in December 2023, passed its own rule mirroring the SEC’s and including reporting requirements. The rule prompted a lawsuit that, Flood observed, is worth watching. “If California is successful in moving forward with this rule, it will be a pivotal development because other states may do the same, but lenders won’t want different states with different reporting methods so it could trigger lobbying efforts for federal reporting requirements.” The outcome of this lawsuit could thus set a precedent for how environmental factors are integrated into financial reporting and lending practices.
- Funding the Federal Fiscal Year 2025 Budget
Flood also advised stakeholders to closely monitor Congress’s activities in September as it pertains to funding the fiscal year 2025 budget. If a budget is not passed as the federal fiscal year ends in October, it could have significant implications for public funding and investment in the real estate sector, and possibly for the pipeline of HUD and GSE loans.
- Local Law 97 in New York City
At the city level, Flood highlighted New York City’s Local Law 97, part of the Climate Mobilization Act. “Local Law 97 aims to drastically reduce emissions from large buildings, a major step towards making NYC carbon neutral by 2050,” Flood noted. The law sets new energy efficiency and greenhouse gas emission limits starting in 2024, with stricter benchmarks in 2030, targeting a 40% reduction in emissions by 2030 and net zero by 2050.
A Look Ahead to the Election
Flood concluded his track by comparing how the themes of a Biden presidency and Trump presidency would differ and what that might mean for the lending environment. “Depending on the election outcome, we will see divergent paths for the industry,” he said. “If the Biden administration continues, there will be a strong focus on using climate and sustainability initiatives through government lending programs like HUD and GSEs. Conversely, a Trump administration would likely prioritize deregulation, and HUD’s climate rules may be delayed or abandoned.” He also noted that Trump tends to lean toward the thought process of borrowers over lenders “because that’s his frame of mind—good, bad or indifferent.”
As the CRE landscape continues to shift, the insights and strategies Flood shared at PRISM 2024 will undoubtedly serve as a critical guide for lenders and industry professionals looking to stay ahead of the curve. As Flood aptly summarized, “Remember that our government is all about slow change and take some comfort in that.”
