Flood Damage and Mortgage Credit Risk: A Case Study of Hurricane Harvey

Abstract

Using a unique, loan-level database that combines post-disaster home inspection data, flood zone designations, and loan performance measures in the area impacted by Hurricane Harvey, we examine the link between property damage, flood insurance, and mortgage credit risk. We find that compared with homes with no damage, loans on moderately to severely damaged homes are more likely to become 90 days delinquent shortly after Harvey. However, longer-term loan performance depends on whether the property is located in areas where borrowers are required to have flood insurance. Where flood insurance is required, loan prepayment rate rises with property damage. In areas where flood insurance is not required, and very few borrowers have flood insurance, we find that as property damage increases, the likelihood of needing a loan modification increases, as does the likelihood of a loan being 180 or more days delinquent or in default during the two years following Hurricane Harvey. Thus, our findings provide direct evidence that flood insurance protects homeowners and mortgage creditors against credit risk arising from flood events. KEYWORDS Flood risk; credit risk; natural disaster JEL CODES Q54; Q58; R20 Flooding is the costliest natural disaster in the United States and coastal flooding, often triggered by tropical storms or hurricanes, is particularly damaging. Costs from floods have been increasing over the past several decades and are projected to continue to do so from the combined effects of increased development and urbanization (Cutter et al., 2018) as well as climate changes including intensification of rainfall, changing storm patterns, and sea level rise (e.g.,

Social Inequalities in Climate Change-Attributed Impacts of Hurrican Harvey

“…The recovery of lower-income and/or minority communities is typically slower and less complete or successful. Research has shown, for instance, that lower income households are less likely to be insured, or get lower compensation from their insurer, ceteris paribus (Cannon et al 2020;Kousky, 2018;Kousky et al, 2020;Owen and Noy, 2019;Shao et al 2017). Indeed, insurance is often essential for a fast recovery (Nguyen and Noy, 2020).…”

Gulf property damage, housing price trends and US bankruptcy filings

“…As mentioned in the introduction, most households do not have flood coverage insurance, and therefore, often default on their post-hurricane mortgage payments. Kousky et al (2020) compared the mortgage payment patterns to homes with no damage, to moderate damage and to severely damaged dwellings after Hurricane Harvey. They concluded that households with moderate and severely damaged homes were more likely to become 90-days behind on their mortgages, and thus, more likely candidates for bankruptcy.…”

Homeowner Flood Risk and Risk Reduction from Home Elevation between the 100- and 500-year Floodplains

“…In a more general sense, a trained model to predict flood damage probability in the conterminous U.S.A. using a suite of geospatial predictors and the location of historical reported flood damage revealed that an astounding 68 percent of flood damage was outside of FEMA's high-risk zone (Collins et al, 2022). Significant attention has been devoted to reducing flood damage exacerbated by climate change and sea level rise (Botzen & van den Bergh, 2008;Hino & Hall, 2017;Kousky et al, 2020a;Xian et al, 2017).…”