Systemic Financial Risk Arising from Residential Flood Losses

Abstract

Flood impacts to residential properties threaten the resilience of communities and the institutions that support them. These events can cause negative impacts to property-level balance sheets through uninsured damage and property value decreases, which in turn can increase the likelihood of mortgage default and property abandonment. To date, there have been limited attempts to quantify the magnitude and distribution of additional financial consequences that could arise from these processes following flood events. In this work, property-scale financial data, including property sales, mortgage originations, and insurance claims, are used within an analytical framework to quantify flood-related uninsured damages and property value decrease in order to estimate the financial risk that property owners, mortgage lenders, and local governments are exposed to via recovery decisions (i.e., default and/or abandonment). This framework is applied to residential properties in eastern North Carolina following Hurricane Florence (2018). Within the study area, Hurricane Florence generated $366M in observed insured losses and we estimate an additional $1.77B in balance sheet losses (i.e., uninsured damage and property value decrease). In addition, property owners, mortgage lenders, and local governments were exposed to an estimated $562M of risk from the increased likelihood of mortgage default and property abandonment. Areas with lower pre-event property values and lower rates of insurance purchase experienced significantly higher risk of mortgage default and abandonment. The method described provides more highly resolved estimates of how floods can drive systemic financial risk, information that can be useful in developing improved flood resilience strategies.

Are Underserved Populations Left Out of National Flood Mitigation Efforts and Facing Greater Impact? A Method to Assess Racial Inequality at the Census Tract Level

“…Therefore, even if certain populations are determined to be the most socioeconomically vulnerable or the most exposed (Martinich et al, 2013), programs like NFIP should be designed to ensure access, justice, and equity (Siders, 2019b). Doing so is critical in order to accomplish goals associated with addressing the public health crisis around availability and access to healthy housing and resources (Limaye et al, 2019;Stephens, 2020), as well as supporting strategies to build resilient communities in both rural and urban areas (Mehryar & Surminski, 2021;Minano et al, 2021), especially those with racial and socioeconomic diversity such as the Carolinas (Thomson et al, 2021).…”

Funding rules that promote equity in climate adaptation outcomes

“…This is not required for benefit-cost analysis for public projects (31). However, it reflects concerns raised in research about economic impacts from the risk remaining in a municipality after property-level interventions are implemented (47,(64)(65)(66)(67). In addition, there are increasing calls for climate-risk assessments to evaluate impacts outside of their traditional scope because climate risks are multisectoral and when unmanaged can lead to cascading impacts (68,69).…”