"David Burt, the CEO of DeltaTerra Capital who is also known for his role in predicting the subprime lending bust, has a new call: the repricing of US residential real estate due to climate-related risks. The housing market stands to take a $1.9 trillion hit, and investors in the GSE’s credit risk transfer market are vulnerable, he says."
Published on July 9, 2021.
Transcription
Al Yoon (00:06):
Hello, and welcome to ABS in Mind, the podcast from the staff here at Debtwire ABS. We'll take you behind the curtains of the asset-backed securities markets and the loans that they help finance. I'm Al Yoon and I'll be hosting today. (00:22) Hello, and thanks for tuning into the ABS in Mind podcast, I'm Al Yoon, senior reporter and assistant editor for Debtwire ABS and I'll be your host today. Today we're exploring some risks to the real estate and mortgage markets that I think aren't always being factored into investment decisions. Those are climate-related risks. That's not to say that climate risk or more narrowly, natural disaster risk isn't on the minds of investors, but we wonder what are they actually doing about it? So let's tackle the issue to do that, we have as our guest, David Burt, founder and CEO of DeltaTerra Capital and investment research and consulting firm focused on identifying and measuring climate risks. Welcome Dave.
David Burt:
Thanks for having me, Al.
Al Yoon:
Sure thing first, Dave, give us a little background about yourself and why you founded DeltaTerra. What was the motivation behind that?
David Burt (01:22):
Sure. Well, my background is more as an institutional investor. I've been helping clients navigate risky markets as an investor and quantitative analyst focused on both direct real estate and mortgage-backed securities, for the last 20 years or so, most recently as a fixed income PM and partner at Wellington Management Company. I decided to focus full-time on climate risk in recent years after my team’s early research on the topic revealed large mispriced risk issues in the real estate markets. I've spent my entire career studying the impact of different thematic fundamental drivers of real estate investment risks and this one is a real doozy ha. So were working on this theme as a small quantitative investment team at Wellington Management where we were running 140 or so different accounts focused on different objectives for clients, but all revolving around finding mispriced assets and positioning folks in such a way to accomplish their goals as investors. (02:40) Really the early modeling work on this theme suggested that it was big enough to warrant a full-time approach. So at the end of 2018, I left my career in fixed income portfolio management and started DeltaTerra and our goal is to assist institutional investors and other agents within the real estate capital markets in the measurement and management of climate-related risks and the day-to-day workflows.
Al Yoon:
Okay. And Dave, you mentioned for Wellington helping them find mispriced assets, for instance. Now you've been out there discussing, including in a letter recently to the Federal Housing Finance Agency a few months ago, what seems to be an alarming mispricing of climate-related risks and real estate and mortgages today? Just wondering if you could start off by giving us a scope of the problem and maybe even a couple of examples, if you can.
David Burt (03:41):
Sure. Well, the most immediate climate risk issue that we're focused on is a current large disconnect between premium dollars being collected and expected hazard losses from climate-related weather events. So actually a reset and current costs expectations could ultimately be just as impactful as a reset and how we expect these costs to change into the future. That's something that people don't always appreciate. We recently performed a thorough bottom-up analysis of continental U.S. single-family property markets. And that was with a lot of help from our climate services partner rescue. And we found an annual gap of about $20 billion a year for the two most under-insured or underpriced risks, which are flood and wildfire. Because these additional costs will need to be absorbed by property owners each year, not just one year, and because the costs are expected to increase over time, the impact on property value of repricing the insurance gap gets really magnified. (04:54) So in our base repricing scenario for the continental U.S. single-family market, this translates to about $1.9 trillion in value losses, which equates to about 3.5% total market value. That's of the U.S. continental single-family real estate market. It does need to be acknowledged probably that that even in our bear case, which involves a 5.6% value correction, that's still half or less the value correction that we experienced at the national level following the Great Financial Crisis or GFC. The problem for mortgage investors in this scenario is that this correction will be concentrated in specific exposed geographies. And a small number of big moves is actually worse for lenders than a large number of small moves, which might've characterized a lot of the average real estate market performance following the GFC. So in our recent response to that FHFA RFI that you mentioned on natural disaster risk at the agencies, we estimated a loss rate of 175 basis points in the Bear scenario on the overall $7 trillion agency mortgage market. (06:08) So that's about half the rate of losses experienced following the GFC on the agency books, but the agency books are actually much bigger now, so in terms of a taxpayer liability, it's still a very meaningful impact.
Al Yoon:
So you've identified the risks and just wondering if you could specify a little bit more about how you see a correction playing out, or how is it playing out if it's already happening? Do you know what I mean?
David Burt:
You know, it's really just starting and like I described, the risks that we're currently focused on is less of the increases into the future, as relevant as that is to this conversation, and more about just the mispricing risks currently at this time. So of course that's an existing mispricing, and there shouldn't be much of a nod to future uncertainty (07:08) when we think about that. And when we did our analysis, analyzing these hazard risks, we actually broke out flood mispricing into three categories and asking, what's going to catalyze a correction here? We looked at the risks that are out there as broken into different categories of hazards. So we looked at wildfire and that's the second biggest risk out there. We also looked at flood broken out into three separate categories. So one is homes within SFHAs or special flood hazard areas. Those are regions that have already been identified by FEMA as having a what's called one-in-a-hundred-year flood risks. So that's actually the largest concern in terms of existing mispricing out there because of the substantial amount of risk that is contained within these regions and very low take-up rates and even lower pricing when there is an insurance premium relative to the actual risk on some of these properties. (08:23) So that's what in the SFHA. Now there's a big project underway at FEMA right now called Risk Rating 2.0 and the goal of that project is to reprice the National Flood Insurance Program, the premiums that they charge in these special flood hazard areas. So just a reevaluation and a repricing of this very core insurance market could be the catalyst to bring expectations for future insurance premiums in line. So that's within a very large portion, about 30% of the properties at risk that we see from a repricing fall into that category.
Al Yoon:
So the higher insurance costs would count as a repricing of the risk, right?
David Burt:
Yeah, exactly. So the issue right now is when someone's looking at a property, they'll get a quote for their NFIP insurance. Say they're in a special flood hazard area so they have to get a NFI P policy. (09:30) If they want to take out a loan to buy the property and say that the quote that they get is $200 a year, and that is what they think that they're going to have to pay. So this is a nuance. This is why the mispricing exists is because these things are mispriced currently and borrowers and property buyers in general, think that those costs are likely to stay current, are likely to stay constant into the future. So if you get a quote for $200 a year for NFIP insurance, you're probably going to think that's what you have to pay every year in the future. That's an assumption that we make in these models that is currently relevant and will probably begin to change in the near future as premiums begin to change as a result of Risk Rating 2.0, but if you then go to sell that property, and this is after Risk Rating 2.0 has been rolled out, the next buyer might see that her premium is now $1000 a year. (10:40) So it's an extra $800 a year that they're going to have to pay to own this home. And they're going to have to pay that extra $800 next year, the year after that, and into some indefinite future.
Al Yoon:
Yeah, it seems that homebuyers/homeowners should be able to wrap their heads around that because I mean, you know, think about taxes. I mean, we all sort of expect our property taxes to keep rising, unfortunately, but they do. Right. So you know, that has to be factored into it when you buy a home. Maybe it's maybe not all people do it, but you know, a lot of people do, I think. So, I mean, why not also understand that your insurance costs because of some natural disaster requirement risk, wouldn't also rise.
David Burt:
Yeah. And we think it's inevitable that this mispricing corrects because the damages are coming. And so really there's a certain level of willingness by government, and really as an expression of taxpayer fiduciary responsibilities, there's a limited willingness of government to just absorb these hazard costs, which are real and on the horizon based on some very reliable science.
Al Yoon (12:03):
And what are your findings regarding wildfire? I just thought about that the other day because I was having a discussion with some friends and in Palm Springs, California, and they were telling us about how their insurance costs are rising exponentially almost.
David Burt:
Yeah. And so the thing about wildfire is the risk has really ramped up over the last few years and, you know, historically, or as the average insurance losses or insurance claims payments due to wildfires and California, we're about $2 billion a year. Three, four…actually four of the last five years, wildfire loss payments were an excess of $5 billion. And we estimate that insurers are really only collecting $1.5 billion a year as a part of their insurance premium to cover those losses. So unlike flood risk, which is really just highly uninsured and the insurance market is highly mispriced, (13:15) wildfire is reasonably insured because typically to buy a home, at least if you're going to get a mortgage, you need at least a regular homeowner’s hazard policy. So flood insurance aside, just regular home insurance. And that traditionally does come with wildfire hazard coverage. But we estimate that the portion that insurers are collecting on high risk properties that are high risk in wildfire again is only about $1.5 billion a year. Now what's happening is because insurers have lost money, for instance, in California, on their homeowners books because of wildfire in three or four of the last five years, they are attempting to pare that risk from their books. And what does that look like right now in practice? Well, two things: one, someone could be going to purchase a home and trying to get new insurance. The other issue where this could become a problem is someone with an existing policy coming up for renewal because remember insurance contracts are typically just one year at a time. (14:27) So every year, insurers have an opportunity to both reprice and re-underwrite. The pricing is very regulated at the state level. So it’s not like they have an opportunity to just price along as things go. And that's another reason why this disconnect has grown over time is regulators only allow for a certain amount of risk based pricing. California is a mess right now because many insurers wanted to pare this risk, but the state actually put a moratorium on insurers not renewing policies because of wildfire concerns. There was an initial moratorium that applied to about 800,000 homes that was in 2019 and 2020. There was another moratorium put in place that covered about 2.2 million homes. Those were homes that have been affected in the massive wildfires in 2020. So these properties next year will not be eligible for a re-up against this moratorium and insurers by all councils are likely to drop those properties. (15:38) So now in order to maintain insurance, all of these property owners will have to go through the state’s FAIR program, which offers supplemental wildfire insurance to complement a difference-in-condition policy from a private insurer. These policies are generally four to five times what someone would have been paying historically for properties’ homeowners insurance, where they were just getting the high state-allowed premium rate. Now they've got to get a DIC policy and the state FAIR policy and that combination is going to be four or five times what they were used to paying.
Al Yoon:
Is it your sense at all that mortgage lenders are taking this into consideration yet? Or how much?
David Burt:
You know, they're all starting to think about it and a there are a few things that I think are getting in the way of progress in adopting of this type of thinking. (16:40) And these are all things that we're very focused on with our research at DeltaTerra. I think one is the nascency of climate conditioned hazard models. So you say, well, in order to decide whether to lend against someone, you want to have a good sense of whether it's a good bet to lend against a particular property. You want to have a pretty good expectation in mind for where that insurance premium is going, because then you can say, okay, this, this borrower could afford an increase in the insurance premium up to this rational level, if you knew what that was, or they can't. So perhaps put the indexed insurance premium into the calculation of the debt-to-income ratio that would allow that borrower to apply for a loan, right? That would be one way that a lender could act to manage this risk. (17:47) However, that insurance premium is still somewhat hard to come by. And there's a reason for that, which is that the historically modeling hazard risk relied on actuarial methods that only look into history for an assessment of hazard damages. Now, with climate changing, we know that these risks are in fact not constant over history, but that they're trending. So now we have a need for a whole new type of hazard modeling and I lumped that into a discipline called climate-conditioned hazard modeling. That's a term used by our climate science partners at RisQ. And essentially this says is, okay, risk probably isn't constant over time if the climate is changing and there's got to be statistical ways to model that outcome. Now, I would just say that the all that work is nascent and the industry is a little bit dogged by the problem right now that you're asked by different people for an average annual loss expectation or AAL for a particular property in a given climate scenario (19:12) and you're going to get five wildly different answers, sometimes magnitudes orders different. So we think that is the main issue that's creating challenges in reliability that are again slowing adoption of this type of thinking, is that these models, the new climate-conditioned models, just like the traditional insurance industry models only looking at history, the new climate-conditioned models are grounded in academic research and aren't validated on any historic data typically. So this makes it very difficult for the industry to coalesce around expectations for rational insurance premiums, that they can then decide whether to underwrite a particular loan or not. So that's a big one. There are other issues, I would say mostly related to systemic incentive structures within markets and a desire for research is going to change lending behavior to have supportive empirical evidence. (20:29) And just to summarize this, you know, historically when there's been natural disasters, it hasn't resulted in a lot of losses on mortgage portfolios, right? And so people don't want to change their underwriting based on an idea about something for which there's no empirical evidence to support it. And I would just say that the reason historically, and there's a lot of work behind this that we've done, that markets have not repriced historically is because after disaster event, a couple of things happen. A lot of government aid comes into the region. Again, based on this historically unlimited willingness of the government to absorb cap losses. That's one. And even more importantly, following a disaster, you've always been able to still get an agency mortgage without any regard for this historic experience. You've been able to get an NFIP insurance policy at the same low rate, right? Unless it's your fifth flooding event. Your fifth flooding event is the time where your property becomes a severe repetitive loss property and is subject to a much higher NFIP pricing. Now, of course, no one ever makes that claim. (21:59) You would rather pay for the damages and be able to maintain this low insurance premium going forward, and that's what happens is historically. So it's really just been, you know, you want some empirical evidence to support the idea that lending against high climate risk properties will result in high losses, but it just isn't there. It's really because of the fact that the big risk is in the repricing of a long future of heightened costs. And that just hasn't happened before in the past.
Al Yoon:
Dave, you talked about empirical evidence, but can we talk about some real life examples, maybe? I'm not sure if this is a good one or not, but you know, it's in the news right now, is this collapse with the Miami condo tower. I'm just wondering from your, I know it's a tragedy, but from a purely pragmatic point of view, what ran through your mind when you saw that?
David Burt (23:07):
Definitely a tragedy is just it's unbearable to even think about. I just feel awful for all the families who are still missing loved ones as they resumed the recovery procedures.
Al Yoon:
I mean, it’s a climate sensitive area, right. So maybe there would be some issue here we could talk about.
David Burt:
Yeah, and we're going to see more on that. You know, I have not seen anyone come out with a definitive “here's the link between that tragedy and climate change,” but some of the things that we're looking at have an obvious connection to structural integrity of a property. And I think we will see those conclusions come out. You know, one of the things I thought about was like, if you have a filter system on your home and you're putting salt into the system to soften your water, like water softener. They always have you put the drain for that, for that filtering system, at least 10 feet from your house. (24:16) So you have to run a long hose out and that's because you don't want the salt coming into contact with your concrete. And there's just horror stories of people putting in these filtering systems and having to redo their foundations because of all the corrosive impact of the salt draining right up against their concrete basements. So I, you know, I've read about that particular property at Surfside, you know, regular salt water flooding into the garage and into the first floor. And it makes you wonder, yeah, that probably reduces the structural integrity, but I think we're going to see, sadly, an assessment that suggests that this was largely a result of accelerated structural integrity decline because of flooding and salt water. And I think, you know, just to tie it out again from a pragmatic perspective, what does that mean in terms of costs? (25:25) That is going to create a need for a lot of spending so that, that does not happen again. Right. So how many properties are now going to have to do $5 to $50 million renovation projects.
Al Yoon:
Right. What is this going to do to the Miami condo market?
David Burt:
Exactly. A who's going to pay for that? Well, it's whoever owns the property. So if you're buying that property now that has any of the types of features that resulted in the Surfside tragedy, you're going to pay a lot less for that property because you know you’re going to have to spend a lot of money to make sure that doesn't happen.
Al Yoon:
Right. And there we have some potential repricing, so to speak.
David Burt:
Yeah, exactly. So we always, we try to make our work intuitive really just by speaking to the impact on insurance costs, insurance premiums. But you know what, it's actually a combination of local taxes for adaptation projects, enhancing structural integrity, resilience spending-- these costs come through to impact future property P&L considerations in a number of ways.
Al Yoon:
Dave, we've laid out (26:48) what some of the issues are. I’d just like to turn, just because we're running out of time here, to the practical use of your research and data. So if I'm a mortgage investor and if I'm a hedge fund or a mutual fund or whatever, how am I using your data? Can you provide sort of specific examples of how some fund uses the data?
Dave Burt:
There are a couple of things that are out there that we think are inhibiting the use of new, powerful climate predictive work in capital markets risk management, in particular the state market. I spoke about one--the lack of reliable climate-conditioned hazard forecasts. That's just the starting point though, for what you need to actually understand the implications of these future cost considerations on a particular asset or on a particular security that has risks to that asset value. (27:55) So it's not so much an insurance market problem, because insurers are a mechanism for risk transfer. They're not the actual risk takers, those are property investors, right. So how do you then translate these future costs of assumptions into the impact of risks that a particular value, a particular property, might decline in value? That's really where DeltaTerra comes in and we're trying to get all the way to the end of the workflow pipeline and saying, well, what would someone actually need to use, to incorporate this information in their day-to-day workflow? Okay. And so that's, that's really what DeltaTerra is all about. We just released our first research subscription offering is called KLIMA CRT. KLIMA is specifically the name of our framework and platform for translating these new scientific hazard projections.
Al Yoon:
Okay. And that's K-L-I-M-A Klima by the way.
David Burt (29:13):
Yes, that's correct. That translates the scientific hazard projections into implications on specific investment assets. We have done a very high level assessment of this risk across all of the different capital markets that support the real estate industry. When you think about it, there's single-family, property markets, there's commercial property markets. They all have different sensitivities to these changing conditions, different levels of pricing. And then each of those real estate markets is also carved up into different things. So you've got homeowners own properties; here's risks there. You've got lenders against properties; there's risks there. And then you've got loans that get bundled up in mortgage-backed securities and there's risks there. We've really looked across all the different real estate capital markets and have found that the most exposed of the capital markets is in some ways a niche area of the capital markets, although it supports now about one and a half trillion dollars in U.S. mortgages, but it's called the credit risk transfer market. (30:30) So you know about that. And I’m sure many of your listeners do, but ultimately the single-family market is more overvalued because of all of the government subsidies and support relative to these increased costs assumptions. So we think that the single-family market is the most acutely exposed relative to commercial currently. Also loans are more exposed in some regards it's relative to their return potential than equity because these problems are likely to be acute in specific areas. And like I said earlier in the conversation, a small number of big losses, big value declines is actually worse for a lender than like a large number of small value to clients because of the protections in place, vis-a-vis the 20% down that the borrower put in. And the last issue with CRTs specifically is that because credit risk transfer bonds absorb losses, bottom of the capital structure. So they actually take the first losses that are generated by this big diversified basket of loans across the United States. Because of that complexion, they are exposed, (31:53) and because this risk is uncertain as to where it's going to materialize firsts, these bonds actually are exposed to the worst outcomes wherever they occur. So we estimate that roughly 20% of properties out there have one of these exposures to either wildfire or flood in an major mispriced way. And so the whole entire CRT capital structure in some cases is only 3- 4% the bottom of the capital structure. So you even have investment grade bonds where if all of those properties reprice and all of them suffered losses, could end up taking principal losses. So we think that the CRT market is the most exposed so that the need for risk management is the most acute. It's also where you need a lot of different walkthroughs from cash flow risk to value-at-risk to implications within the capital structure to get to a useful workflow analytic or an analytic that for instance, the TCFD, the Task Force on Climate Disclosure would suggest is decision-useful. (33:18) So specifically any CRT investor in the types of clients we're speaking to are pretty much any institutional investor that might invest in CRT. So you're talking about money managers, insurance companies on the asset side, pension funds, sovereign wealth funds, and the like, so all of these folks might be looking to purchase say into an allocation of 2019 B1s to spend into a targeted allocation because they got an inflow for instance, and you might have a BWIC, a “bids wanted in competition” come out and it's got four 2019 B1s on it. The Klima product, what it can be used to do is to say, well, here is the coverage ratio, the loss coverage ratio of that bond given, the expectation for losses as a result of a climate repricing in a base and a bear scenario. And you can look at that coverage ratio relative to the spreads being talked on those bonds in the market. (34:38) And you say, oh, well, I could, I can try and buy this at a 300 DM, but look, this one is trading in a 350 DM and the Klima coverage ratio is in a 1.5 versus 1.2 for the other. And that's an obvious return per risk or benefit. And that tends to be a pretty standard way that someone might look at making some sort of allocation IN CRT CUSIPS, is this relationship between coverage against a certain risk and the spread being offered on that bond.
Al Yoon:
I wonder how well that works in today's market with, and it's just past inflation all over the place. Right? Right. I mean, it's a, I mean, I find that there, well, investors tell me that other investors are always sort of tweaking their assumptions or to rationalize paying a higher price for something.
David Burt:
Yeah. You know, I think that's really the case. (35:39) And I would say that is a lot of the reason that, that this gets perpetuated. when you're a CRT investor, typically your job is to deploy capital into that asset class. And so you're going to be biased to want to buy things, and it can be detrimental to your competition as a bond buyer if you start introducing analytics that discourage you from buying certain bonds, it might make you less competitive. My observation, that incentives aren't aligned as well as they would need to be to create these efficient market. This, this is something that the FHFA asks about in their RFI as well. People often look at my observation about incentives and they're expecting me to point fingers. And honestly, I don't think that's what it's about. I don't actually see any nefarious agents here. Just a lot of well-meaning professionals doing the jobs they believe they're supposed to do (36:53) in this imperfect system. So is it true that a dedicated CRT investor might be reluctant to spend a lot on research? They don't want to believe in and may ultimately get in the way of their market competitiveness when buying bonds? I think that's a real thing, you know, and I think it would be pretty naive to think otherwise, however, most of these same professionals really do care about the fiduciary responsibilities to clients. And they aren’t out there fighting tooth and nail to resist risk management improvements. You know, this is clearly evidence in the positive perception we've been getting on our new Klima CRT product, because this provides the exact climate impact estimates--CUSIP, deal, and loan level for CRT bonds--in the way that they need it to make buy and sell workflow decisions and, you know, a subscription fee that represents a fraction, a small fraction, less than 5% of what a typical annual management fee might look like in the asset class. (37:58) So when analytics providers are complaining that investors don't buy their data because they don't care about climate, they're really missing the point. We think investors aren't saying no to factoring climate change risks into their investment decisions. They're saying no to multi-year, multi-million dollar internal R & D projects that turn scores and unproven point in time estimates into analytics that are trusted in decision-useful. So we're hoping to close that gap for the markets.
Al Yoon:
Dave, one more question, and then we've got to go, unfortunately. I'm just wondering what your thoughts are on government policy. We've just had a change at the top of the FHFA. You know, market watchers generally say that this person, Sandra Thompson, will be, you know, more akin to carrying out a president Biden's agenda as just sort of stating the obvious, but I'm just wondering what you thought in terms of mortgage policy.
David Burt (39:01):
What's interesting is the Biden is going to have two almost competitive issues with regard to the FHFA, especially around climate change, because, and this almost speaks to just the overall competing priorities of the agencies. So really the idea is to foster liquidity and allow for mortgage accommodation, to anyone who's shown, you know, a reasonable ability to pay their bills. That's really the goal of the agencies. And the FHFA is supposed to support that. However, that's a huge taxpayer liability and the FHFA is also responsible for dealing with that issue. I think what's new, and historically what this has resulted in is the FHFA supporting generally things that broaden credit extension and relying on things like CRT to deal with the credit risk. So they're like, okay, agencies, you do what you're supposed to do and then come up with a way of letting the markets manage the taxpayer liability or share responsibility of that. And that's really, you know, so now there's a third issue. And historically, what, what that's ultimately resulted in is a lot of easy lending. (40:33) Because ultimately they do want to fulfill their primary obligation and if they can do it in a way that feels risk-managed, they're going to. So when it comes to something like climate, right, again, the tendency is to say, well, if you pulled credit from the risky properties, that could cause further equity problems, that could create challenges for homeowners in certain markets. Like we don't want to do that. I think what's changing, and I think that this is probably going to overcome in a way whoever put Biden puts in place, an just with regard to the Biden administration's recommendations, there's really this new idea that we have to do something about the climate crisis. And I think there's growing acceptance, and this is somewhat evidenced by the FHFA RFI that came out in January, right? That wasn't even a Biden administration installed group (41:37) and yet they were very forward-thinking about climate risks and really it's coming from a desire to deal with the looming climate crisis. And more and more people are coming around to the idea that offering cheap insurance and cheap mortgages to at-risk properties is probably a part of that--is part of the climate crisis. And that needs to be dealt with almost as a priority over these other competing mandates agencies. So I think that that is going to win out. And I'll just tell you the thing that makes me feel like this is evidence-based and in some to some degree was really the, the Risk Rating 2.0 dynamic. So Risk Rating 2.0 always gets super challenged. Any sort of revision at the NFIP always gets challenged by politicians. If insurance rates get hyped in someone's specific region, they think they're less likely to get votes in the future, which is probably true. (42:49) What you saw with Risk Rating 2.0 this year, it already got punted from last year, which was obviously going to happen because it was right before huge national election. So it was originally supposed to roll out October 1st, 2020. They punted to October 1st, 2021 when FEMA really started talking about releasing their methodology papers and impact assessments to Risk Rating 2.0, coming out in October of this year, you had the usual pushback from politicians. And one of the most vocal actually came from Chuck Schumer who was pushing back because, you know, he's concerned a lot of his constituents are on Long Island. They have a higher value properties that are at-risk and he was concerned about moving ahead with this. And there was such a huge backlash to his concern, like right down to a front page, New York times article. (43:51) Maybe it wasn't front page, maybe it was just front page in my feed or whatever, but anyways, there was a huge pushback and primarily from the left against his opposition to Risk Rating 2.0 because people know that it's time to deal with the climate crisis and that allowing market forces and, not even like encouraging, but allowing market forces to help manage this risk is key. To do that, you have to let go of inefficient government subsidies that are contributing to the climate crisis and we'll move forward, hopefully with some of the recommendations that we post in RFI. Essentially the idea is to do things gradually. You don't want to pull credit from an area and indiscriminately damage everyone in that area. So some sort of adoption, and this will be helped with increasing acceptance and increasing standardization of climate risk analytics. (45:03) We can help, we hope to be helpful in the progression in the reliability of those types of tools. And we do think that eventually they will adopt smart things that allow for a gradual repricing of these costs into mortgage lending. So either through LLPAs that assess climate-adjusted DTI or original loan-to-value, we think that that's probably the most likely way for folks to move forward. Also, really a much deeper look at the current mandatory flood obligation for agency borrowers. We think that's really important as well, but I think they will probably move forward with that initially because it should be easy. And then over time, we'll get more comfortable with this idea of some sort of insurance-indexed debt-to-income ratio or net present value-impacted loan-to-value ratio.
Al Yoon:
Okay (46:16) So that's interesting, then instead of just talking about these things, maybe it's your sense and hope that you know, something will actually start to move on these issues. So that'll be interesting to watch going forward. Okay. Dave we're out of time and I would just want to thank you so much for taking so much time with us. And I mean, I'm guessing that we'll have a lot to catch up on, on the future, right. Since investors are just really adopting this this Klima model that you're offering, right?
Dave Burt:
Yeah, exactly. We're starting with the CRT we’ve got the “Six Sigma version” of that ready to go, but we're having lots of discussions with originators, lenders, commercial real estate investors, and we're going to continue to go deep with this stuff with clients, look forward to more discussions in the future and grateful for your focus on the issue and for talking to us.
Al Yoon:
Well, thanks again. That's it for ABS in Mind. Thanks everybody. Thanks for listening to ABS in Mind, if you're hungry for the skinny on asset-backed bonds, residential and commercial mortgage debt, consider debtwire.com or just tune in here next time. Also look to us on social media.