Feeling the Heat: Mortgage Lending and Central Bank Options

Extreme heat periods due to the global climate change are having a negative impact on many areas of the economy. In our study, we look at how much US mortgage lending goes to the areas that are most vulnerable to future heat waves, and what government and central bank actions could mitigate the resulting risk. From our results, we see that proportionally more lending flows into the areas that are likely to be most exposed to heat in the future. Population and economic output are relatively higher in these areas, and thus climate risk is less of a factor in lending decisions. However, lenders reject proportionately slightly more mortgage/ loan applications in the counties that are expected to be the hottest. Central bank and supervisory authority measures to support climate objectives are therefore of key importance. These could include, for example, central bank asset purchase programmes to support sustainable construction, especially in areas vulnerable to climate change, or the development of collateral management along similar lines. Coordination between the different authorities is also important because of the limitations of central bank actions.