Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

Citing climate risk, investors bet against mortgage market

Published Sep 29, 2019 08:04AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

By Kate Duguid

NEW YORK (Reuters) - David Burt helped two of the protagonists of Michael Lewis' book The Big Short bet against the U.S. mortgage market in the run-up to the 2008 financial crisis. Now he's betting against the market again, but this time, the risk is not from underwater subprime mortgages, it's from homes sinking under water.

As he did then, Burt has given up his full-time job to make that bet. He left his role as a portfolio manager at the $1 trillion Wellington Management last year to start an investment firm, DeltaTerra Capital, which aims to help clients manage climate risk, and, where possible, take advantage of ways the market has not yet priced in that risk. His first investment strategy is targeting residential mortgage-backed securities, or RMBS, with exposure to climate hot spots like Texas and Florida.

In doing so, Burt is joining the ranks of a small number of investors who have become worried that climate risk is underpriced in these securities, which are pools of home loans sold to investors.

"The market's failure to integrate climate science with investment analysis has created a mispricing phenomenon that is possibly larger than the mortgage credit bubble of the mid-2000s," Burt wrote in a presentation to prospective clients.

Most mainstream investors remain skeptical of the impact of climate change on their portfolios or argue that they are diversified enough not to have to worry about the risks.

Burt and at least three other investors said in interviews with Reuters that they think the risk is real. They argue that a growing body of academic research and data shows that hurricanes, flooding and other disasters pose a far larger threat than is currently being priced into mortgage securities.

"I don't think you need any new climate effects to come to draw these conclusions. The ones I see happening right now, I just need to get a little unlucky with them and I'm in trouble," said Thomas Graff, head of fixed income at Brown Advisory. Graff abandoned a riskier type of RMBS after Hurricane Harvey hit Houston in 2017.


Climate researchers and investors say a key culprit for the mispriced risk in the U.S. mortgage market is outdated flood maps drawn by the federal government.

These maps determine the premiums on government-sponsored home insurance policies. Due to budget cuts, more than three-quarters of the maps have not been updated in at least five years, according to First Street Foundation, an organization that is developing a publicly accessible database of up-to-date flood risk information.

Outdated maps mean far fewer people are required to have flood insurance than are at risk, the investors and researchers say. A University of Bristol estimate put the actual figure at around three times the 13 million Americans currently living in designated flood zones.

The gaps are evident: About 70% of all damages to homes that were flooded during Harvey were not covered by insurance, according to CoreLogic.

The federal government provides most flood insurance in the United States and the gaps mean the risk is not properly priced. The cost for an average policy in low-risk Green Bay, Wisconsin, for example, is three times that in Gulfport, Mississippi, a town devastated by Hurricane Katrina, according to Burt.

The Federal Emergency Management Agency has said it aims to fix some of these problems with a major risk re-rating on Oct. 1, 2020.

Burt’s bet is that the move will result in significant cost increases. That in turn will lead to home price declines and mortgage losses, which would increase volatility in RMBS prices.

He expects a correction beginning in the next 6-18 months.

"The bet I'm making is that many regional markets will experience large price declines in response to increasing costs related to the geography-specific risks," Burt said.


There are many risks to Burt’s thesis. In the past few years, RMBS prices have recovered after disasters such as Harvey. The federal government has stepped in with aid when losses were not covered by flood insurance.

David Goodson, head of securitized fixed income and senior portfolio manager at Voya Investment Management, said he does not dismiss RMBS deals that have significant concentration in flood hot spots like Miami or Houston.

"While there are more vulnerable population centers that are at greater risk, I think it would be imprudent to out-of-hand dismiss deals that have a concentration in a particular" area, he said.

Burt thinks the mainstream view will be proven wrong. Some of the conditions that allowed prices to recover after Harvey, such as redevelopers bailing out homeowners, could disappear if there is an economic downturn.

Investors also have been taking on more risk. Some RMBS issued by Freddie Mac and Fannie Mae since 2017, called credit risk transfer (CRT) deals, move the risk of default to the investors. In traditional agency RMBS, Fannie and Freddie cover those losses.

Between 2% and 4% of the loans in outstanding CRT deals were located in Houston and other areas badly hit by Hurricane Harvey, according to Bank of America (NYSE:BAC). While prices of these securities recovered, investors in lower tranches of the capital structure in some deals took losses they did not recover.

This is because the most junior tranches have little or no protection. The lowest tranche of the most recent Freddie Mac CRT will start losing principal if mortgage pool losses exceed 0.1%.

"It has been building up," Burt said, "and so when the correction comes, it will probably come in a more meaningful way than people are expecting."

Citing climate risk, investors bet against mortgage market

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your profile, will be public on and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Bill Hoerter
Bill Hoerter Sep 29, 2019 7:24PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Severe weather cycles have and will occur over periods up to decades in length. This is somewhat of a con game betting on fears of youngsters and freshman congresswomen. Legitimate climate scientists are disputing the analysis of the data that we are near the end of Earths long term sustainability.
Benjamin USA
Benjamin USA Sep 29, 2019 9:11AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
6-18 months? Good luck woth that bet.
Trend Kill
Trend Kill Sep 29, 2019 9:11AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
um i think he can afford it...
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email