Mortgage Finance in the Face of Rising Climate Risk Amine Ouazad Matthew E. Kahn NBER Working Paper No. 26322

Issued in September 2019, Revised in April 2020

NBER Program(s):Asset Pricing, Environment and Energy Economics, Political Economy

With increasing natural disaster risk and declining flood insurance take-up, homeowners in coastal areas may be at increasing risk of mortgage default. Banks have the ability to screen and price mortgages for flood risk. Banks also retain the option to securitize some of these loans. Bank lenders may have an incentive to sell their worse flood risk to the GSEs. Unlike lenders, the GSEs follow observable rules for the purchase and the pricing of securitized mortgages. This paper uses the impact of one sharp rule, the conforming loan limit, on securitization volumes. Results suggest a substantial increase in mortgage securitizations for loan amounts right below such limit after a billion-dollar natural disaster. Such increase is larger in neighborhoods when the disaster is “new news”: lenders may learn about local risk. Con- forming loans are more likely to default. A structurally estimated model of mortgage pricing and securitization suggests that bunching at the conforming loan limit is an increasing function of perceived disaster risk. A simulation of increasing disaster risk with and without the GSEs suggests that the GSEs may act as a substitute for the declining National Flood Insurance Program. You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery. Access to NBER Papers You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy. If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access. E-mail:

Acknowledgments Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w26322