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Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters

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  • Amine Ouazad
  • Matthew E Kahn

Abstract

Using the government-sponsored enterprises’ sharp securitization rules, this paper provides evidence that, in the aftermath of natural disasters, lenders are more likely to approve mortgages that can be securitized, thereby transferring climate risk. The identification strategy uses the time-varying conforming loan limits above which the government-sponsored enterprises do not securitize mortgages. Natural disasters lead to more securitization right below the limit, suggesting an increased option value of securitization. A model identified using indirect inference simulates increasing disaster risk without GSEs. Mortgage credit supply would decline in flood zones and lenders would have a greater incentive to screen mortgages.

Suggested Citation

  • Amine Ouazad & Matthew E Kahn, 2022. "Mortgage Finance and Climate Change: Securitization Dynamics in the Aftermath of Natural Disasters," The Review of Financial Studies, Society for Financial Studies, vol. 35(8), pages 3617-3665.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:8:p:3617-3665.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab124
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General

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