Unintended Consequences of "Mandatory" Flood Insurance

Blickle, Kristian; Santos, João A. C.

doi:10.2139/ssrn.4086765

Cited by 9 publications

(15 citation statements)

References 42 publications

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“…Additionally, subsidization of National Flood Insurance Program (NFIP) premiums and climate-agnostic mortgage lending practices have created distorted price signals by transferring flood-related costs away from property owners 15 . Only recently are these price signals starting to shift under the NFIP's new pricing methodology, Risk Rating 2.0, which determines premiums based on individual assessments of flood risk and rebuilding costs for each property 16 , and as mortgage lenders begin to insulate themselves from credit risk associated with exposure to flood risk [17][18][19][20] .…”

Section: Resultsmentioning

confidence: 99%

“…Recent evidence suggests that lenders are increasingly transferring the credit risk associated with flooding to 'government-sponsored enterprises' (that is, Fannie Mae and Freddie Mac), whose debts are backed by taxpayers, and to capital markets through increased securitization of mortgages in flood-prone areas 18,19 (Box 1, Scenario A). Lenders could also mitigate this risk through tools aimed at flood zone borrowers, which could include credit rationing through lower loan-to-value ratios, broadening and enforcing mandates to carry flood insurance, increasing interest rates and/or denying loans 17,20 (Box 1, Scenarios B and D). Together, these practices have the potential to send price signals to flood zone homeowners, potentially leading to greater capitalization of flood risk.…”

Section: Discussionmentioning

confidence: 99%

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Unpriced climate risk and the potential consequences of overvaluation in US housing markets

et al. 2023

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Climate change impacts threaten the stability of the US housing market. In response to growing concerns that increasing costs of flooding are not fully captured in property values, we quantify the magnitude of unpriced flood risk in the housing market by comparing the empirical and economically efficient prices for properties at risk. We find that residential properties exposed to flood risk are overvalued by US$121–US$237 billion, depending on the discount rate. In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change. Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls. The consequences of these financial risks will depend on policy choices that influence who bears the costs of climate change.

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Section: Resultsmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Unpriced climate risk and the potential consequences of overvaluation in US housing markets

et al. 2023

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“…As we noted above, we explicitly focus on properties that are outside of flood zones. As such, we ignore flood mapping as this is discussed in detail in Blickle and Santos (2021).…”

Section: Methodsmentioning

confidence: 99%

“…This ensures the risk of catastrophe is not borne by the mortgage borrower or their lender. The insurance scheme and the consequences thereof are discussed in detail in Blickle and Santos (2021). However, flood maps are discrete with stark boundaries while flood risk itself is continuous across certain geographies.…”

Section: Introductionmentioning

confidence: 99%

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Do Mortgage Lenders Respond to Flood Risk?

Blickle,

Perry,

Santos

2024

Staff Reports (Federal Reserve Bank of New York)

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Using unique nationwide property-level mortgage, flood risk, and flood map data, we analyze whether lenders respond to flood risk that is not captured in FEMA flood maps. We find that lenders are less willing to originate mortgages and charge higher rates for lower LTV loans that face “un-mapped” flood risk. This effect is weaker for high income applicants, as well as non-banks and small local banks. However, we find evidence that non-banks and local banks are more likely to securitize/sell mortgages to borrowers prone to flood risk. Taken together, our results are indicative that mortgage lenders are aware of flood risk outside FEMA’s identified flood zones.

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